Omaxe reviews - a review of the competition issues in the real estate sector an analysis of the...

COMPETITION COMMISSION OF INDIA

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

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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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TABLE OF CONTENTS ABSTRACT…………………………………………………………………………………5

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 DLF’s abuse of dominance……………………….………19

Implications of the order…………………………………………………..……….20

Consumers’ dilemma post DLF order……………………………………...………21 .

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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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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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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OVERVIEW OF THE REAL ESTATE SECTOR IN INDIA

The Indian Real Estate industry grew at a rate of 20% per annum in the five-year period prior

to 2010 to become the second highest employment provider after agriculture.1 The real estate

sector in any country plays a significant role in shaping the infrastructure. The importance of

the sector can be noted by the fact that a HUDCO-IIM, Ahmedabad study recently observed

that for every Rupee invested in this sector, the addition to the GDP of the State is 78 Paise.

Residential real estate is witnessing a continuous growth due to various factors like growth of

population, migration, growth in income etc.

The real estate sector in India suffers from inherent entry barriers. Initially acquiring land is a

difficult task for developers and even after that a number of issues like litigation, court orders

and cancellation of allotment of land are faced by the builders.

Source: CRISIL Indian Real Estate Overview

1http://www.icmrindia.org/casestudies/catalogue/Business%20Ethics/DLF%20and%20Indian%20Real%20Estate%20Industry-Case%20Study.htm


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Regulation of the Sector

The Indian Real Estate Sector is widely unregulated. Though there is some regulation in the

form of the various approvals mandated by the law for the developers, there is specifically no

regulator for the sector. According to a study carried out by FICCI and E&Y: “On the

Regulatory index amongst the countries surveyed India ranked last along with Russia

amongst ten countries surveyed namely - China; US; UK; Singapore; Germany; Brazil; UAE;

Russia; and India. Due to their developed real estate markets and streamlined regulatory

environment, developed nations such as the US, UK and the Singapore closely follow China

on the index. India ranks fifth on the overall index, as it scores better on the country economy

development index and the real estate market index, but fairly low on the regulatory index. In

developed countries, the regulatory framework is typically well-established, organized and

transparent. As such, the regulatory environment in such countries serves as an effective

watchdog. In contrast, the regulatory scenario in developing nations is at a nascent stage.

Consequently, developed countries lead the regulatory index.”

The need for a regulator in the real estate sector has been said to be more than that of a

regulator of stock exchange since real estate per se affects more consumers.2

The Draft Real Estate (Regulation and Development) Bill, 2011

The Real Estate Bill is a novel step and has the potential to curb the menace that has ensued in

the Real Estate Sector in the recent times, if proper implementation is ensured. The Bill seeks

to establish the Real Estate Regulatory Authority to see that the real estate sector functions

properly. It contains provisions for disclosures by developers on the estimated time by which

they will complete the projects, compulsory uploading of the proforma Builder Buyer

2 V Raghunathan, “Home buyer at the mercy”, Moneylife, September 6, 2012.


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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

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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ABUSE OF DOMINANCE IN THE REAL ESTATE INDUSTRY

Relevant Market

The foremost issue in any abuse of dominance case is defining the “relevant market”. This is

important since dominance, if any, is assessed and analysed only in the perspective of the

relevant market. The relevant market comprises of the relevant product market and the

relevant geographical market. The attempt of the person bringing forward a case to the CCI is

always to define the relevant market in the narrowest possible manner while the Opposite

Party always tries to define it in a wide manner. It is on the CCI to view the situation and

decide what should be the relevant market, a decision that sometimes becomes very

controversial.

Relevant Product Market: It consists of the smallest set of close substitutes. Substitutability

is seen from the demand side as well as the supply side, that is, the products which a

consumer would find substitutable and those which the producer can shift to given his

existing facilities.

Relevant Geographical Market: It is the market wherein the conditions of competition are

fairly homogenous. For determining the relevant geographical market, various factors have to

be taken into consideration like: shipping costs, local specification requirement, regulatory

trade barriers, adequate distribution facilities, transport costs, language, etc.

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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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. Market share of enterprise

ii. Size and resources of enterprise

iii. Size and importance of competitors

iv. Commercial advantage of enterprise over competitors

v. Vertical integration

vi. Dependence of consumers

vii. Dominant position as a result of a statue

viii. Entry barriers

ix. Countervailing buying power

x. Market structure and size of market

xi. Social obligations and costs

xii. Contribution to economic development

xiii. 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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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 & Ors6, 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

“Abuse” of the dominance

In the real estate sector, the “abuses” normally complained of are in terms of either unfair and

discriminatory terms in the Apartment Buyer Agreement or delays in the possession.

Unfair Terms of Contract

The Supreme Court of India in the case of Central Inland Water Transport Corporation Ltd.

and another v. Brojo Nath Ganguly8 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 Case No 62/2010 7 Raghavan Committee Report on Competition Law, AKZO Chemie v. Commission (1993) 5 CMLR 215. 8 (1986) 3 SCC 156


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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 won’t 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

9 http://beta.propequity.in/PressRoom/Sep13ET_Large.jpg 10 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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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

EMI’s 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.

12 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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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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BELAIRE OWNER’S ASSOCIATION V. DLF LIMITED AND HUDA13

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.

13 2011 CompLR 0239 (CCI)


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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

Contentions of the Opposite Party

DLF contended at length that it is not a Dominant Player in the relevant market. It pointed out

that a number of competitors exist in the market and there is stiff competition and further that

there are no impediments to the entry of new players. It explained its high turnover with the

fact that it has presence in other markets also. It was also contended that the conditions

included in the agreement are the “usual practices” adopted by the builders and are part of

industry practice. DLF also contended that the allotees had various options in respect of

making a choice of buying an apartment and also signed the agreement after considering all

the pros and cons in respect of their investment.


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Order of the Commission

The CCI observed that while assessing dominant position of an enterprise, the sole factor is

not the market share of the enterprise in the relevant market but a host of other factors are to

be seen which are enumerated in S. 19(4) of the Competition Act, 2002. It analyzed the

various factors and came to the conclusion that DLF is dominant in the market of Gurgaon.

After looking at the various one sided terms of the agreement and the condition of the

consumers in this case, DLF had abused its dominant position.

The following are the sixteen clauses in the Apartment Buyers Agreement which were

considered to be unfair by the Commission:

i. Unilateral changes in the agreement and the power to supersede and substitute the

terms of the agreement with respect to subsequently approved lay out plans without

the consent of the apartment allottees;

ii. DLF’s right to change to layout plan, again without the consent of the apartment

allottees;

iii. Discretion of DLF to use areas owned by the allottees in the compound for other

purposes like residential, commercial;

iv. It was mandatory to pay preferential location charged paid up-front, but when the

location was unavailable, the refund would of the amount of his last instalment

(without any interest);

v. Unilateral right of DLF to increase and decrease super area with consent of allottees

who had to bear the price of this right, by being coerced to make additional payments

as and when necessary;

vi. DLF has the right to substitute the method of calculating the proportionate share in

ownership of the land beneath the building and/ common area and facilities even

though the allottees has already been promised he owns a certain amount of land;

vii. The allottees have no rights in regard to the community recreational facilities;


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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. Allottees have no rights relating to alterations of the building;

xv. 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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Gurgaon and modify such conditions within three months from the date of receipt of the

order.

Competition Appellate Tribunal (COMPAT)

The fine imposed by CCI has been stayed by the Competition Appellate Tribunal (COMPAT)

on being approached by DLF. The COMPAT has also ordered DLF to submit the draft of the

modification to the contentious terms of the agreement within eight weeks.

Other orders relating to DLF’s abuse of dominance

i. DLF Park Residents v. DLF Ltd14: In this case, while the agreement had been made

on one premise of building 19 floors in each tower, DLF subsequently scrapped the

project and started constructing a new project with 29 floors in each tower without

informing the buyers. This led to unreasonable delay in the completion of the project.

Since the contravention committed by DLF in this case was similar to that in Belaire

Owners’ Association v. DLF and hence no separate penalty was imposed on DLF.

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.

14 Case no. 18 of 2010


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Implications of the DLF Order

For Real Estate Players:

The order of the CCI has wide implications for the other real estate players in the market. The

former DG at CCI remarked that the order will send “strong signals to the real estate market”.

DLF in its contentions had alleged that the practices adopted by it are part of industry practice

and are followed by all the builders in the market. Several other builders also have similar

clauses in their agreements with their flat buyers. The CCI, in its order has also urged various

state governments and the central government to come out with real estate regulations to

ensure that the consumers do not suffer in the hands of such one sided agreements and other

practices which are detrimental to the interests of the consumers as a whole. For DLF itself,

the “cease and desist” order could prove a hurdle in launch of new projects. Though the

penalty has been stayed by the COMPAT, the same is not true for the “cease and desist”

order. Hence it is quite possible that DLF will not be able to launch new projects using the

same agreements.15

This order is significant in the sense that it is the first instance in India where competition law

has covered the “exploitative” nature of abuse of dominant position. The jurisprudence earlier

relied mainly on “exclusionary” abuses like predatory pricing or refusal to deal etc.16

Exploitative abuse takes within its ambit those behavior patterns on the part of firms which

have a direct detrimental effect on consumers. Hence it should be a precedent for the real

estate companies who must now themselves try to ensure that they so not face any similar

situation in their future.

For Consumers:

15 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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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 person’s life and hence it

becomes very disappointing when there are delays or unfair practices in that.

Consumers Dilemma post DLF Order

It has been seen that after the passing of the DLF order imposing penalty, a series of 200

complaint letters have been received by the Competition Commission of India in relation to

similar claims, 15 of which were official cases17. It has been alleged that several other

builders have also adopted similar practices as those adopted by DLF and similar “unfair”

agreements have been made by them.

CASES DISMISSED BY THE CCI BECAUSE OF THE LACK OF DOMINANT POSITION

Name of the Real Estate Company Date of Dismissal

DLF Ltd Nov 27, 2012

Dwarkadhis Proj Pvt Ltd, Delhi Oct 11, 2012

Supertech Noida Oct 4, 2012

Purearth Infrastructure Ltd Aug 7, 2012

Senior Builders Ltd and Pacific Greens Infracon Pvt Ltd July 19, 2012

17 Dilasha Seth, “Competition Commission flooded with complaints against realtors”, Business Standard, March 25, 2012, New Delhi.


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Universal Buildwell Ltd July 26, 2012

Emaar MGF May 16, 2012

Unitech May 8, 2012

HSIIDC Ltd Apr 4, 2012

Omaxe Feb 21, 2012

Hirco Developments Feb 9, 2012

Kolkata West International City Jan 24, 2012

Exact Developers Jan 12, 2012

Today Homes Jan 12, 2012

Raheja Developers 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.

18 “Housing” has been included in the definition of “service” in Section 2(o) of the Consumer Protection Act, 1986.


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Mr Vinod Dhall, former acting Chairman of CCI said in relation to the order: “Real estate

sector was waiting to get some kind of discipline…But this does not mean that CCI has

become a consumer court. Both have different roles. CCI’s 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 CCI’s 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.

19 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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CARTELIZATION IN REAL ESTATE?

Another competition issue that can be considered in the real estate sector is that of

cartellization. It was DLF’s own contention that the agreements used by all the builders are

the same as these are part of “industry practice”. DLF has alleged: “The conditions included

in the agreement are ‘usual conditions’ as per industry practice and thus cannot be said to

have been imposed by abuse of dominant position. Since the clauses of the agreement

objected to are usual clauses as per industry practice and adopted by other competitors also

in their respective agreements to meet competition it is necessary to incorporate such clauses

in order to remain competitive.” It may hence be possible to see collusion in these practices

and if such collusion is indeed found, an action for cartelization can be taken against the real

estate companies.20 The CCI is considering a suo motu investigation to see whether the real

estate companies have colluded and are using the same techniques to harass the consumers.21

In considering the point of cartelization, however, a difficulty arises. Three essential factors

have been identified to establish the existence of a cartel, namely agreement by way of

concerted action suggesting conspiracy; the fixing of prices; and the intent to gain a monopoly

or restrict/eliminate competition.22 A mere parallel behavior on the part of enterprises is not

punishable under the Competition law unless it is a result of a concerted practice. Concerted

practice entails the meeting of minds.23 The problem becomes less difficult where there is a

formal agreement between the parties. In the Competition Act, 2002 agreement includes any

arrangement or understanding or action in concert. Hence it may be possible that all real

estate companies or most of them follow similar practices and conclude similar agreements

with their buyers, but the threshold of meeting “action in concert” will be a difficult task for

20http://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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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 Ors25., 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 AG26 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.

Standard form contracts and Competition law

A standard form contract should meet the standards of three laws: contract law, consumer

protection law and competition law. In the former two, the contract would not face any

24 346 US 537 (1954). 25 MANU/CO/0011/2011. 26 (2004) 4 CMLR 13


Page 26

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 anti-

competitive 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 Ass’n, 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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AFTERMARKET ABUSE AND ITS APPLICABILITY TO REAL

ESTATE SECTOR

In the supplementary judgment by Mr. R Prasad, the concept of aftermarket abuse as laid

down in the case of Eastman Kodak Co. v. Image Technical Services has been highlighted and

applied in the context of the real estate sector. Before analyzing whether this can indeed be

applied to the sector, it would be pertinent to first understand the facts of the Kodak case.

Eastman Kodak Company v. Image Technical Services, Inc

In the case of Eastman Kodak Company v. Image Technical Services, Inc29., et al. the theory

of after-market abuse was propounded. The case related to denial by Kodak to supply its

equipment parts to Independent Service Operators (ISOs) which had begun servicing Kodak

photocopiers and micrographic equipments in 1980’s. The ISO’s provided maintenance

services normally 15-30% below the price charged by Kodak. Kodak’s action was aimed at

making it more difficult for ISOs to compete with Kodak in servicing Kodak equipment.

Kodak even went on to the extent of ensuring that equipment owners do not buy more parts

than they would reasonably require. This was challenged by the 18 ISO’s in 1987 before the

Court on the ground that the act of Kodak was in violation of Article 1 (Tying) and 2

(monopolization and attempt to monopolize) of the Sherman Act. It was alleged that Kodak

used its monopoly over parts to monopolize the service market and had tied its service labour

to parts and thereby had adversely affected competition in the service market. The plaintiffs

subsequently withdrew the tying claim and the only claim that remained was of

monopolization in the service market of high volume photocopiers and micrographic

equipments.

29 504 U.S. 451 (1992)


Page 28

The district court in the matter ruled against Kodak and issued a ten-year injunction requiring

Kodak to sell its parts to the ISO’s at non-discriminatory prices. Against this, Kodak appealed

to the Ninth Circuit and mainly put forth three questions30:

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 established31:

(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.

30 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).


Page 29

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

32 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


Page 30

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


Page 31

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”.


Page 32

BUILDERS ASSOCIATIONS AND THEIR ROLE

In India, trade associations have been assisting members on cartelisation even during the

golden days of the MRTP Commission. In 1977, the MRTP Commission had to issue a “cease

and desist” order to the Indian Woolen Mills Federation after it had facilitated a price fixing

cartel among its members.34

Canadian Competition Bureau Interim Commissioner John Pecman in his speech recently

remarked: “Trade associations face unique compliance issues. They are naturally exposed to

greater risks of anti-competitive behaviour because they provide a forum that may encourage

competitors to collaborate. For this reason, compliance programs are of the utmost

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

Conduct35 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

34 Pradeep S Mehta, “Trade Associations as cartels”, Financial Express, October 13, 2011 35 Available at: http://www.builders.org.uk/resources/nfb/000/304/443/Competition_law_code_of_conduct_-_August_2009.pdf


Page 33

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


Page 34

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

37 Neha Nagpal, “CREDAI’s code of conduct fills a void of regulatory authority in Indian realty”, The Times of India, Dec 27, 2012


Page 35

CONCLUSION AND RECOMMENDATIONS

On the Indian Real Estate Sector in general:

The real estate sector in India is plagued by the requirement of around 52 approvals for every

project that is proposed to be undertaken by them. This leads to a time period of two to three

years differing from state to state.38 In such a scenario, it is a major concern that even though

the Real Estate Bill makes promising provisions, it will just be another “approval

requirement” for the developers.

Among industry players, when asked about the provision of the Bill they found most

regressive, 47% opted for mandatory registration of each project with the Real Estate

Regulatory Authority. The other opinions were as follows39:

• 20% said it was the requirement to keep 70% of the amount realized in a project in a

separate account and use it only for the purposes of the said project

• 17% said that the most regressive provision was the prohibition from receiving any

advance without first entering into an agreement with the buyer.

• 15% opted for the provision that maximum two years extension can be provided after

the expiry of the initial period of completion of the project.

Considering these points, it is recommended that there should be attempts made to reduce the

amount of approvals required to be taken by the developers. Developers have time and again

brought forward the demand for single window clearance in the sector.40 If the Real Estate

Regulatory Authority cannot be made a single window clearance immediately, attempts

should be made towards that direction and to see that this Authority does not end up

becoming another “approval” for the developers. Again, as regards competition, the Authority

38 Realty Decoded, FICCI-E&Y Indian Real Estate Report 2010. 39 Emerging Trends in Real Estate, Grant Thornton-CII Report 2012. 40 “CREDAI code of conduct to ensure transparency”, The Hindu, June 18, 2011.


Page 36

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.


Page 37

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.


Page 38

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.


Page 39

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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