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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
INTERNSHIP REPORT
DECEMBER 2012
SUBMITTED BY: Kirti Dashora, IV Year, Gujarat National Law University (GNLU), Gandhinagar
A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
ACKNOWLEDGEMENTS
The successful completion of this project could not have been completed without the valuable guidance and insights of many people. I would like to thank Mr. Yogender Chaudhary, Adviser (Law) for guiding me throughout my internship period. I would also like to thank Ms. Bhawna Gulati, Deputy Director (Law) for providing me helpful suggestions regarding the project. I also thank all the officers in the Commission who provided knowledge of the working of the Commission during the rotation exercise. The library staff also provided help whenever it was required.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
TABLE OF CONTENTS
ABSTRACT5 OVERVIEW OF THE REAL ESTATE SECTOR IN INDIA...6 Regulation of the Sector..7 The Real Estate (Regulation and Development) Bill, 2011....7 ABUSE OF DOMINANCE IN THE REAL ESTATE SECTOR..9 Relevant Market..9 Assessment of dominance...9 Abuse of dominance..11 BELAIRE OWNERS ASSOCIATION V. DLF LTD. & HUDA...15 Other orders relating to DLFs abuse of dominance.19 Implications of the order...20 Consumers dilemma post DLF order...21
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CARTELLIZATION IN REAL ESTATE....24 Standard form contracts and Competition Law.....25 APPLICABILITY OF AFTERMARKET ABUSE TO THEREAL ESTATE SECTOR.27 Eastman Kodak Company v. Image Technical Services, Inc ...27 Switching costs..28 Supplementary order in DLF case ....29 BUILDERS ASSOCIATIONS AND THEIR ROLE....32 CONCLUSION AND RECOMMENDATIONS......35 REFERENCES..37
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
DISCLAIMER
This project report has been prepared by the Author as an Intern under the Internship Programme of the Competition Commission of India (CCI) for academic purpose only. The views expressed in the report are personal to the Intern and do not reflect the view of the Commission or any of its staff or personnel and do not bind the Commission in any manner. This report is the intellectual property of the Competition Commission of India and the same or any part thereof may not be used in any manner whatsoever, without express permission of the Competition Commission of India in writing.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
ABSTRACT
Henry Clay, American Secretary of State remarked in the 19th Century: of all human powers operating on the affairs of mankind, none is greater than that of competition. Though Competition is vital in all the sectors of the economy, it becomes imperative in a sector like Read Estate since it has the inherent capability of affecting other sectors of the economy. This project seeks to revisit the competition issues in the real estate sector in India, after the DLF Order which has been hailed as landmark by many. The scope of the project is restricted to the housing industry. It analyses the consumers position and also the industry position and the proposed changes in the law governing the real estate sector.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
http://www.icmrindia.org/casestudies/catalogue/Business%20Ethics/DLF%20and%20Indian%20Real%20Estat e%20Industry-Case%20Study.htm
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE agreements on the Regulatory Authorities website, online declaration of all project details. There are various other provisions like equal rate of interest payable by the developer and the buyer in case of any default, prohibition of false and misleading advertisement, undertaking of clear title over land. It also provides that the real estate developer shall be required to deposit at least 70% of the funds received from end customers into a dedicated project account, which can be utilised only for the purposes of the project. No advance can be taken from the buyers before first entering into an agreement with them. To check delays, registration can be extended only up to two years beyond the original period for development granted by the local licencing authority. The Bill also seeks to have proper coordination with the Competition Commission of India (CCI) by providing in its Section 33 that if any issue comes up before the Regulatory Authority relating to an agreement, action, omission, practice or procedure which can lead to prevention, restriction or distortion of competition in the real estate sector, it may refer the matter to the CCI. It has been held by the Commission that sectoral regulators focus on the dynamics of specific sectors, whereas the CCI has a holistic approach and focuses on functioning of the markets through increasing efficiency through competition. In fact their roles are complementary and to each other and share the objective of obtaining maximum benefit for the consumers. 3
Shri Neeraj Malhotra v. North Delhi Power Limited, BSES Rajdhani Power Limited and BSES Yamuna Power Limited, Case No. 06/2009
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
Assessment of dominance
It is well settled law that before analyzing whether an enterprise has abused its dominant position, it is paramount to first assess whether the firm is dominant in the relevant market or not. Only if it is dominant does the case for abuse come in. In the Competition Act, 2002,
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE there is no arithmetic criterion that can determine dominance in the market. 4 The erstwhile MRTP Act contained a 25% benchmark for a firm to be called dominant but this was removed on the transformation to the Competition Act. The Act, however, enumerates the various aspects which the Commission has to look into while assessing dominance. Dominance has been said to be a position of strength enjoyed by an enterprise in a relevant market which enables it to operate independently of the competitive forces prevailing in the dominant market or affect its consumers or competitors or the relevant market in its favour. The various factors given under S. 19(4) are as follows: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. Market share of enterprise Size and resources of enterprise Size and importance of competitors Commercial advantage of enterprise over competitors Vertical integration Dependence of consumers Dominant position as a result of a statue Entry barriers Countervailing buying power Market structure and size of market Social obligations and costs Contribution to economic development Any other factor
It has been observed by the Commission in its order in Poonam Gupta v. Unitech Ltd. 5 case that for an enterprise which has a presence throughout the country, a high Market
4
In South Africa, a firm is irrefutably considered to be dominant of its market share exceeds 45%. [Section 7(a) of the Competition Act, 1998] 5 Case No. 04/2012, along with Rohit Gupta v. Unitech Ltd, Case No. 05/2012
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE Capitalization cannot be an indicator to determine its dominance in a particular market since it may have little or no operations in that particular market. In the case of Informant v. Cdr. Kuldeepak Mittal & Ors 6, it was held that the Government Officials Welfare Organisation (GOWO) (a Public Trust engaged in the business of developing residential apartments for government officials in Noida and Gurgaon) did not have a dominant position in the relevant market of Gurgaon since it was one of the builders operating in the relevant market and had no definite advantage in terms of market knowledge, economies of scale and experience. It further did not have any significant chunk of land holdings with it in that geographical area. A high market share of a firm is not a factor to conclusively determine that a firm is dominant. It has to be seen in the perspective of the market shares of the competitors in the relevant market. For example, if one firm has a market share of around 45 % and the rest of the market is diffusedly divided among weak players, he may be considered dominant. However, if the rest of the market is divided among key rivals, the doubt of dominance will be reduced. 7
Unfair Terms of Contract The Supreme Court of India in the case of Central Inland Water Transport Corporation Ltd. and another v. Brojo Nath Ganguly 8 held that parties to the agreement should be on equal footing and with same bargaining power. In this context, it may be said that when a flat-buyer
6 7
Case No 62/2010 Raghavan Committee Report on Competition Law, AKZO Chemie v. Commission (1993) 5 CMLR 215. 8 (1986) 3 SCC 156
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE enters into an agreement with a builder, the bargaining power is somewhat lacking. There is usually a standard form contract which the buyer has to sign in case he wants to buy the apartment. A contract between a buyer and builder suffers from an innate lack of equal footing. It is a contract between a huge developer and an individual which suffers from information asymmetry. It is a standard one sided agreement containing various unfair terms. There are some states which themselves regulate the unfair, onerous and one sided agreements between buyers and builders. A suitable example of this is the Maharashtra Ownership of Flats Act, 1963. It has a number of provisions to ensure that the builder is not able to harass the buyer.
Delays by builders According to a report by a property research firm Propequity, nearly half of the 9,30,000 under construction residential units in India, scheduled to be delivered between 2011 and 2013 are likely to be delayed by up to 18 months. 9 According to real estate research firm Liases Foras, nearly half of the 3,23,000 homes that were to be delivered in 2013 will be delayed; and a third of these wont be ready before 2015. 10 Developers announced a lot of projects in the pre 2008 crisis time but were unable to complete these due to a funding crunch. The worst performer was NCR with only about 23% of the projects completed by January 2012. The reason for this is said to be that the projects were very large and so the developers were not able to complete them on time. 11
http://beta.propequity.in/PressRoom/Sep13ET_Large.jpg Ravi Teja Sharma & Vijaya Rathore, Aggreived Buyers Speak Up Online ! Real estate firms resort to online reputation managment on social media, Economic Times, Nov 28, 2012 11 Varnika Kukreja, When will I be delivered my house? A big question faced by most of the developing firms in India; which has put a full stop on the dreams and aspirations of an average common man, Property Observer, June 22. http://beta.propequity.in/PressRoom/June22PO_Large.jpg
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE When there are such delays by the builder, the buyer faces huge losses. In a situation when a person buys an apartment in order to save the money he/she has to incur every month on the rents in the current accommodation and there are delays by the builder in handing over possession. The buyer can nowhere see the project being completed for years together. In such a scenario, not only does the buyer have to pay the regular rents but has to also pay the EMIs for the flat he/she has purchased but not got. The buyer gets fixed in a trap and is unable to get out of it. 12 The perspective of the developers on the delay in the projects is that this delay is due to the multifarious sanctions and approvals that are to be taken by them in respect of all projects. They estimate that these approvals take around 2-3 years and hence propose that there must be a single window clearance with which it is possible to procure the approvals within 4 weeks.
Namrata Kohli, DELAY, DEFAULT AND DECEIT: The 3Ds Plaguing The Real Estate Industry, How Should a Buyer Or An Investor Deal With This Triple Malaise, The Times of India, Sept 29, 2012.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE With respect to construction approvals, Doing Business, a report by World Bank and International Finance Corporation ranked India at 177 out of 183 countries in 2011 and the position further deteriorated in 2012 at 181 out of 183 countries.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
BELAIRE OWNERS ASSOCIATION V. DLF LIMITED AND HUDA 13 Contentions of the Informant:
The informant (Belaire Owners Association) in this case contended that DLF Ltd had abused its dominant position and inflicted several unfair and arbitrary terms of contract on the apartment allottees of the Group Housing Complex, the Belaire. In specific, the informant has pointed out the following points in support of the contention that DLF had abused its dominant position: i. Each of the five multi storied buildings was to originally have 19 floors each with a total of 368 apartments. However ignoring the fact that this was the basis on which the allottees booked their flats, DLF constructed 29 floors in each building. ii. DLF had conferred on itself the exclusive right to reject and refuse to execute any Apartment Buyers Agreement without assigning any reason for doing so. It could further carry out any changes in the layout plan for which the consent of the allottee shall not be a necessity and if any amount is liable to be returned in respect of preferential location charges to the allottees on account of such change, it would not be refunded but adjusted in the last installment without any interest. iii. Time is made of essence with respect to the payment obligations of the allottee but not the performance of DLF. iv. In case of failure by DLF to deliver the possession, the allottee is obligated to give a notice to terminate the agreement. DLF is not bound to refund the money but gets the right to sell the apartment and only thereafter repay the amount. v. DLF has unilaterally reserved to itself the right to create any lien or mortgage to raise finances. In case of non-payment, the allottee becomes the direct sufferer.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE vi. The penalties for delay by the respective parties are highly non-commensurate. The allottee is to pay 15% for the first 90 days of delay and 18% after 90 days whereas DLF is obligated only to pay Rs 5 per sq ft for every month of delay (which is 1% p.a) vii. Between the date of booking and the date of execution of the ABA, the allotee had already paid amounts to the tune of Rs 85 lakhs without knowledge of the unfair terms that would be included in the ABA. Thereafter, there was delay in taking the necessary approvals by the company and before the construction was even started, DLF had around 33% of the consideration in its pocket.
Relevant Market:
High End residential accommodation in Gurgaon
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE viii. The current project underway (Belaire) can be linked to another one at the sole discretion of DLF which would alter the ambience and quality of living, which is the main reason that allottees have decided to invest in the project in the first place; ix. DLF made it mandatory for the allottee to pay any extra external charges that would arise during the construction; x. Arrangement of the supply of power to the apartments and their rates are in the hands of DLF can be levied as and when desired; xi. Arbitrary forfeiture of amounts paid by the allottee as earnest money, brokerage charges etc; xii. No exit option for the allottees, in case possession is not handed over and even in that event the money is refunded without interest after the apartment has been sold to someone else. DLF had minimized any loss possible for itself but had maximized losses for the allottee in every situation; xiii. DLF at any point can abandon the project without any penalty. In case possession is not handed over within three years of the agreement, DLF is liable only to refund the amount paid by the apartment allottee with a simle interest at 9% per annum for the period such amount was lying with DLF. If the project is delayed beyond three years, compensation will be paid at a mere 5%. xiv. xv. Allottees have no rights relating to alterations of the building; Third party rights created to raise finance/loan, which is to the detriment of the allottees without their consent; xvi. Penalty in case of default of payment for the allottees is at a rate of 15% for the first ninety days after which it would at 18% per annum.
The CCI imposed a penalty of Rs. 630 crores for abusing its dominant position in the relevant market of Gurgaon by imposing unfair conditions in its agreements with the flat buyers. DLF was ordered to cease and desist from imposing such unreasonable conditions with buyers in
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE Gurgaon and modify such conditions within three months from the date of receipt of the order.
ii.
M/s Magnolia Flat Owners Association & Others. v. M/s. DLF Universal Limited & Others: In this case, after the payment of 90 percent of the sale consideration by the buyers, DLF wanted to change the building plan thereby increasing the number of floors. The agreement also contained various one-sided clauses. DLF was ordered to cease and desist from imposing such unfair conditions and to suitably modify the terms of the agreement within three months.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
For Consumers:
Dilasha Seth, Amid calls for fairer buyer pacts, DLF launches in face of CCI order, Business Standard, Dec 06, 2012. 16 MM Sharma and Vaibhav Choukse, Impact of Competition Law on Indian Real Estate Sector: An analysis of Order against DLF, 2012 CompLR B-111.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE The order in the DLF case has been hailed by a number of consumers who have faced similar harassments in the hands of the builders as faced by the informants in that case. Many of those consumers have also approached the CCI with similar claims of abuse of dominant position. Buying a home is the biggest financial investment of a persons life and hence it becomes very disappointing when there are delays or unfair practices in that.
CASES DISMISSED BY THE CCI BECAUSE OF THE LACK OF DOMINANT POSITION Name of the Real Estate Company DLF Ltd Dwarkadhis Proj Pvt Ltd, Delhi Supertech Noida Purearth Infrastructure Ltd Senior Builders Ltd and Pacific Greens Infracon Pvt Ltd Date of Dismissal Nov 27, 2012 Oct 11, 2012 Oct 4, 2012 Aug 7, 2012 July 19, 2012
17
Dilasha Seth, Competition Commission flooded with complaints against realtors, Business Standard, March 25, 2012, New Delhi.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
Universal Buildwell Ltd Emaar MGF Unitech HSIIDC Ltd Omaxe Hirco Developments Kolkata West International City Exact Developers Today Homes Raheja Developers
July 26, 2012 May 16, 2012 May 8, 2012 Apr 4, 2012 Feb 21, 2012 Feb 9, 2012 Jan 24, 2012 Jan 12, 2012 Jan 12, 2012 Dec 21, 2011
The crucial point to be seen in this regard is the overlapping of the jurisdictions of the CCI and consumer forums. 18 Mostly, the allegations that the Apartment buyers are putting forward are in the nature of mere consumer disputes. Though the preamble of the Competition Act, 2002 reads in its ambit the protection of consumers interest also, it cannot overtake the role of the consumer forums. Many consumers have regarded the DLF judgment as their protector and have approached the CCI. It is further pertinent to point out that the abuse of dominant position provisions can be applied against an enterprise only when it is first dominant. It is due to these reasons that in a majority of cases the CCI has held that there is no prima facie case and left the option open to the consumers to approach an appropriate forum.
Housing has been included in the definition of service in Section 2(o) of the Consumer Protection Act, 1986.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE Mr Vinod Dhall, former acting Chairman of CCI said in relation to the order: Real estate sector was waiting to get some kind of disciplineBut this does not mean that CCI has become a consumer court. Both have different roles. CCIs role comes in only where competition is affected. 19 The consumers approach the CCI in regard to practices of the developers. However, CCI can only take up a case when it affects competition in the market, that is to say CCIs eyes are to see malpractices in the market and not to do justice in regard to individual consumer cases. Considering this point in mind, the CCI has dismissed a number of cases regarding real estate developers since there was no competition issue in those cases.
Moumita Bakshi Chatterjee, Competition panel order on DLF project may send strong signal to unregulated realty market, Business Line, Aug 17, 2011.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
http://www.nishithdesai.com/New_Hotline/Competition/Competition%20Law%20Hotline-%20Final%20%2012%209%202011.pdf 21 http://www.track2realty.com/verdict-may-open-pandoras-box-for-real-estate-sector/ 22 ITC Ltd v MRTP Commission (1996) 46 Comp Cas 619 23 Pranjal Prateek, Parallel Behavior and Agreements: Where is the dividing line?, Comp LR 2011 B-193
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE the CCI. Mostly the companies do not enter into formal agreements in relation to cartelization. In the US case of Theatre Enterprises, Inc. v. Paramount Film Distribution Corporation24, it was observed by the US Supreme Court that the business behavior of a firm is a circumstantial evidence from which an agreement may be inferred. Recently, in the case of Consumer Online Foundation v. Tata Sky Ltd and Ors 25., the CCI expressed its opinion in relation to the controversy of agreement in the following words: The definition of cartel under Section 2(b) of the Act has the phrase by agreement among themselves as its fulcrum. For any practice to be considered as concerted action, the facts must be counterpoised on that fulcrum of by agreement amongst themselves. Such agreement should not be adduced, assumed or arrived at through eliminative or wishful reasoning but must be concluded through amassment of undisputable evidences. The establishing of joint mens rea of non-competition is imperative. It has been held in the case of Commission vs. Bayer AG 26 that it is sufficient that the parties to the agreement have expressed their joint intention to conduct themselves in the market in a specific manner. As regards the form in which the common intention is expressed, it is sufficient for a stipulation to be the expression of the parties intention to behave on the market in accordance with its terms. Hence, it may be pointed out that if the CCI wants to prove cartelization it will need to prove that the firms have agreed to act in concert and mere parallel behavior will not be sufficient.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE problems unless its terms are unfair. However, to bring it within the violation of competition law, it is not necessary that the terms should be unfair, even the fact that firms have colluded in making the contract adversely affects competition in the market. One factor which gives a clear suspicion of cartelization is the use of similar terms in the contracts of most of the builders or developers. This is the concern of standardization of the terms of an agreement. Though it is said that initially standardization can give rise to ease in comparison of the products or services offered by all the producers but it can also weigh down competition in the market. 27 Analyzing the competitive effects of the standardization, it may be said that from this aspect, even if the terms are not unreasonable, they have the effect of reducing competition among firms. Another point in this regard is the involvement of consumers. If the consumers have a chance to express their views in regard to the contract, for example, in case of an insurance contract if they have a say in the covered areas, the suspicion of anticompetitive behavior is diluted. 28 If all or most firms use similar standard form agreements, it gives rise to a second level of standardization. This may be harmful in the sense that the consumers will not be able to take refuge from unfair terms even if he switches to another producer or service provider. Hence, this concern should be addressed and the issue of standard form contracts and their impact on competition law should also be looked into.
27
Mark R. Patterson, Standardization of Standard form contracts: Competition and Contract implications, William and Mary Law Review, Vol 52, No.2, 2010 28 Moore v. Boating Industry Assn, 819 f.2d 693, 703 (7th Cir. 1987); Consolidated Metal Products, Inc. v. American Petroleum Institute, 846 F.2d 284, 295 (5th Cir. 1988);
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE The district court in the matter ruled against Kodak and issued a ten-year injunction requiring Kodak to sell its parts to the ISOs at non-discriminatory prices. Against this, Kodak appealed to the Ninth Circuit and mainly put forth three questions 30: i. Can Kodak be required to sell patented parts and copyrighted service software and manuals? ii. Can all Kodak parts be a relevant market, despite the lack of substitutability between two different parts? iii. Can a firm be convicted of monopolizing its aftermarkets without first being found to have obtained supracompetitive systems profits or prices? All these three points were decided against Kodak by the Ninth Circuit. It was held that Kodak was involved in Aftermarket abuse.
Switching Costs
In simple terms, switching costs are those costs which a consumer expects to incur if he shifts to another product instead of continuing with the current one. Here, it may be said that defendant manufacturer can be found to have sufficient market power in an aftermarket only if the following conditions are established 31: (1) high switching costs faced by consumers; (2) consumers lack the necessary information before sale to engage in life-cycle pricing to determine the total cost of owning the primary good; and (3) after locking in the consumers, the manufacturer undertakes changes in the policies or behavior which are detrimental to consumers.
Jeffrey K. MacKie-Mason and John Metzler, Links between Markets and Aftermarkets: Kodak (1997), The Antitrust Revolution- Economics, Competition and Policy, Oxford University Press, Fifth Edn, 2009. 31 David A.J. Goldfine, Kenneth M. Vorrasi, The fall of the Kodak Aftermarket doctrine: Dying a slow death in lower courts, 72 Antitrust Law Journal No. 1 (2004).
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE It is widely established, even in the Kodak judgment that if the switching costs are very high, the consumer is more likely to be locked in and bear some level of price increases in the aftermarket. Consumers facing high switching costs are vulnerable to aftermarket exploitation because they are unwilling and unable to shift to another brand to avoid supracompetitive aftermarket prices. 32 Hence considering this approach of the consumer of being more likely to be locked in instead of incurring high switching costs, it becomes pertinent to note that when the consumers are indeed locked in, the producer or supplier can abuse this and get involved in post sale opportunistic behavior. In the real estate sector, it may be said that the consumers are faced by high switching costs. If, after buying a flat they realize that the developer is inflicting unfair treatment, he is more likely to suffer the abuses instead of incurring the high costs to switch.
Supplementary order in DLF case and the applicability of Aftermarket Abuse to Real Estate sector
One of the members of the CCI passed a supplementary order in the case. While agreeing to the majority judgment, he said that the Aftermarket abuse rule applies in the case of real estate transactions. After carefully highlighting the judgment in the Eastman Kodak Case, he went on to point out that in the case of real estate also there are two markets: one where the buyer is looking for a suitable flat and the other where he/she has already entered into an agreement with a developer. He said that once the agreement is concluded, it is by virtue of the agreement that the builder acquires dominance in the market. It was brought within the ambit of Section 19(4)(g) which says that a firm may otherwise acquire monopoly or dominance. Otherwise was interpreted widely enough to include an agreement. 33 The reasons for the possibility of such an aftermarket abuse were concluded to be high switching costs and
David A.J. Goldfine, Kenneth M. Vorrasi, The fall of the Kodak Aftermarket doctrine: Dying a slow death in lower courts, 72 Antitrust Law Journal No. 1 (2004). 33 DLF Park Place Residents Welfare Associations v. DLF Ltd., Case no. 18/2011
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE information asymmetry. It was further held that the agreements created an appreciable adverse effect on competition in India because the high switching costs for on the part of the buyers would foreclose the market for new entrants. When we analyze Aftermarket abuse from the perspective of real estate, it may be said that since real estate is a big investment, people are quite careful in regard to buying a flat. When a person buys a house and is faced with such unfair terms of contract, it is very disappointing for him since once he is locked in with one developer, he cannot then withdraw and go to another developer considering the huge amounts of money already paid. Hence, real estate as a market has a characteristic of high switching costs. It is one sector where there are a number of big players, some of whom are very huge and have a high market power. To the extent of high switching costs and locking in of consumers, the doctrine can be applied to real estate sector. However, the essence in which the doctrine is understood generally and even in the Kodak case entails two markets: one market of the product itself and the other of servicing or maintenance. Due to locking in, the firm seeks to abuse in the servicing or maintenance market. The application of the doctrine to real estate sector in the supplementary judgment has been done to constitute the condition before the signing of the Apartment Buyer Agreement as one market and the condition after the agreement as the second market. It has also been ruled that dominance is acquired by virtue of the agreement. In a hypothetical case, if a player, not as big as DLF, enters into an agreement with a buyer and includes similar clauses as those included by DLF in the impugned case. The firm has very nominal market power. The question arises as to whether it can be said that due to the agreement the firm has acquired dominance? Having nothing close to a dominant position in the market as such, can the firm be considered dominant merely because of the agreement? If the application of the doctrine is stretched too far, then every builder in every market will be held to be a dominant player since dominance is held to be acquired through agreement. It is suggested that the point of acquiring dominance through agreement should only be an additional consideration for the
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE CCI and not the sole consideration. The idea of locking in, information asymmetry and high switching costs can be applied to the case of real estate sector. However, if the aftermarket doctrine is applied in a counterfactual sense, and dominance is held to be acquired through an agreement, then every case against a real estate developer which comes before the CCI will be decided against the developer. In such a scenario, every developer in India will be held to be abusing his dominant position.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
importance to trade associations. Trade Associations in general can play a very significant role in ensuring that there is competition in the market. By setting standards for the members to follow, they can get compliances from the players.
UK
National Federation of Builders (NFB) is a prominent builder association in the UK. It recently launched an industry wide code of conduct which mandates that UK construction companies should meet the highest level of competition law compliance. The Code of Conduct 35 puts an obligation on construction companies to comply with EU and UK competition law and states that each individual construction company is accountable for its own compliance with competition law and that the consequences of breaching competition
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Pradeep S Mehta, Trade Associations as cartels, Financial Express, October 13, 2011 Available at: http://www.builders.org.uk/resources/nfb/000/304/443/Competition_law_code_of_conduct_-_August_2009.pdf
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE law are severe including possible penalties, director disqualification, criminal sanctions and damages actions. It further states that Construction companies will therefore endeavour to: i. ensure that competition law compliance will be achieved through implementing effective competition compliance policies and guidelines throughout their businesses; ii. Promote an understanding of and compliance with competition law throughout their supply chains, including with their sub-contractors. It further, in very clear terms states that the construction companies shall not engage in anti competitive agreements, collusive bidding and shall not share competitively sensitive information or engage in discussions that may lead to the co-ordination of competitive behaviour and, in particular, must not share information about current or future pricing intentions for tenders, or any element that might affect prices or pricing practices, including the exchange of cover prices.
Indian Position
Recently the CCI has undertaken the task of looking at whether any competition law violations are committed or facilitated by trade associations. 36 Trade Associations must be a means to ensure the growth of the industry and see that concerns which cannot be put forward in individual capacity can be done through associations. They must not turn into a platform for firms engaging in anticompetitive behavior. In the Real Estate sector, the Confederation of Real Estate Developers Association of India (CREDAI) is the association which has more than 6000 members and functions through various chapters. The CREDAI has issued a transparency code to ensure that transactions in the real estate sector take place in a lucid and ethical manner. The code of conduct covers relevant guidelines like launching projects
36
http://www.cci.gov.in/images/media/News/news09/datacurbs.pdf
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE only after getting all approvals, detailed area statements of the saleable area, uniform agreement clauses for all buyers, terrace rights, conveyance of 100 per cent UDS , delivery as per commitment etc. 37
Neha Nagpal, CREDAIs code of conduct fills a void of regulatory authority in Indian realty, The Times of India, Dec 27, 2012
37
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Realty Decoded, FICCI-E&Y Indian Real Estate Report 2010. Emerging Trends in Real Estate, Grant Thornton-CII Report 2012. 40 CREDAI code of conduct to ensure transparency, The Hindu, June 18, 2011.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE must ensure proper coordination with the CCI and the two bodies must work together to improve the face of the Indian Real Estate Industry.
On the role of Builders Associations: CREDAI must embark on the responsibility of ensuring that the developers do not try to become larger than the competitive forces in the market. Specifically after a case like DLF has come before everyone, it is expected that the association must take a proactive step to ensure the code of conduct laid down by it is followed and any violations should be seen strictly. Further, specific guidelines to ensure competitiveness in the real estate market are the need of the hour. International practices in this regard should be taken into consideration and best practices should be adopted by the associations in India. It must also undertake monitoring of the competition compliances by the firms under its ambit.
On practices in the real estate sector: The practices in the real estate sector relating to the practice of making standard form contracts containing unfair and discriminatory terms should be checked so that competition in the market is not harmed. Delays in the projects and changes in the layout without the consent of the buyer should be also checked. It is hoped that most of the concerns will come to an end when the Real Estate Regulator is brought in and starts functioning.
On the role of the Competition Commission of India: The CCI must now play a role in looking into the agreements entered into by various developers with their customers. There is a possibility of inquiring into the practices from the perspective of cartelization. The conditions of purchase that various developers put forward are similar in nature. If collusion in the same is proved, it can become a very good case for CCI to look into and impose penalties if any violation is found.
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A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
REFERENCES Articles
1. Benjamin Klein, Market Power in Aftermarkets, Managerial and Decision Economics, Vol 17, 143-164 (1996). 2. Daniel J Gifford, The Damaging Impact of the Eastman Kodak Precedent Upon Product Competition: Antitrust Law in Need of Correction, 72 Wash. U. L. Q. 1507 (1994) 3. David A.J. Goldfine, Kenneth M. Vorrasi, The fall of the Kodak Aftermarket doctrine: Dying a slow death in lower courts, 72 Antitrust Law Journal No. 1 (2004). 4. Enno Eilts, Restricting Competition: Land Agreements at Shopping Centres and Airports, [2011] Comp Law, Volume 10, Issue 2, 154. 5. M Holmes, S Murphy, Shopping centre assessments- some tips for the UK from other jurisdictions, (2010) Competition Law Insight, 11, July. 6. Mark R. Patterson, Standardization of Standard form contracts: Competition and Contract implications, William and Mary Law Review, Vol 52, No.2, 2010 7. MM Sharma and Vaibhav Choukse, Impact of Competition Law on Indian Real Estate Sector: An analysis of Order against DLF, 2012 CompLR B-111. 8. Pranjal Prateek, Parallel Behavior and Agreements: Where is the dividing line?, CompLR 2011 B-193
Books
1. D.P Mittal, Competition Law and Practice, Taxmann, 2nd Edn, 2008. 2. Jeffrey K. MacKie-Mason and John Metzler, Links between Markets and Aftermarkets: Kodak (1997), The Antitrust Revolution- Economics, Competition and Policy, Oxford University Press, Fifth Edn, 2009.
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Newspaper Reports
1. CREDAI code of conduct to ensure transparency, The Hindu, June 18, 2011. 2. Dilasha Seth, Amid calls for fairer buyer pacts, DLF launches in face of CCI order, Business Standard, Dec 06, 2012. 3. Dilasha Seth, Competition Commission flooded with complaints against realtors, Business Standard, March 25, 2012. 4. Moumita Bakshi Chatterjee, Competition panel order on DLF project may send strong signal to unregulated realty market, Business Line, Aug 17, 2011. 5. Namrata Kohli, DELAY, DEFAULT AND DECEIT: The 3Ds Plaguing The Real Estate Industry, How Should a Buyer Or An Investor Deal With This Triple Malaise, The Times of India, Sept 29, 2012. 6. Pradeep S Mehta, Trade Associations as cartels, Financial Express, October 13, 2011 7. Ravi Teja Sharma & Vijaya Rathore, Aggreived Buyers Speak Up Online ! Real estate firms resort to online reputation managment on social media, Economic Times, Nov 28, 2012 8. V Raghunathan, Home buyer at the mercy, Moneylife, September 6, 2012. 9. Varnika Kukreja, When will I be delivered my house? A big question faced by most of the developing firms in India; which has put a full stop on the dreams and aspirations of an average common man, Property Observer, June 22.
Reports
1. Emerging Trends in Real Estate, Grant Thornton-CII Report 2012. 2. Realty Decoded, FICCI-E&Y Indian Real Estate Report 2010.
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Web Sources
1. http://www.icmrindia.org/casestudies/catalogue/Business%20Ethics/DLF%20and%20 Indian%20Real%20Estate%20Industry-Case%20Study.htm 2. http://beta.propequity.in/PressRoom/Sep13ET_Large.jpg 3. http://beta.propequity.in/PressRoom/June22PO_Large.jpg 4. http://www.nishithdesai.com/New_Hotline/Competition/Competition%20Law%20Hot line-%20Final%20-%2012%209%202011.pdf 5. http://www.track2realty.com/verdict-may-open-pandoras-box-for-real-estate-sector/ 6. http://www.builders.org.uk/resources/nfb/000/304/443/Competition_law_code_of_con duct_-_August_2009.pdf
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