Unprecedented in the fine imposed, The DLF case has in many ways redefined the way the realty sector is now going to function in India. What was the DLF case really and what will be its effect on the industry in the days to come? Read on to get the complete story
At a time when market sentiment is in the doldrums and uncertainty of the outcome of growth versus inflation looms large, corporate India seems lost in the jamboree. Adding pressure to India Inc is the political uprising that is threatening to destabilize the government. With no clarity on policy and an impending slowdown in growth, the corporate sector especially the realty seems to have lost its sheen
In the case of DLF Ltd v Belaires owner Association (2011) 102 CLA 336 (CATDEL), India’s largest real estate firm lost a 15-month battle. The Competition Commission of India (CCI), the free trade regulator, imposed a penalty of Rs 630 crore on real estate major DLF for misusing its dominant position in the market by drafting one-sided agreements with flat buyers in Belaire housing complex in Gurgaon. The penalty on DLF is the largest-ever imposed on any company by the CCI. The previous record was held by the National Stock Exchange which was asked to pay a penalty of over Rs 500 crore.
On May 5, 2010, the Belaire Owner’s Association — an association of buyers in DLF’s Belaire residential project in Gurgaon— complained to the CCI that DLF was violating the provisions of the Competition Act, 2002. Its main grouse was delay in completion and alteration ofbuilding plans without approval. Belaire flat owners had complained of inordinate delay and had also alleged that the developer inserted clauses that were “arbitrary, unfair and unreasonable” on apartment buyers. The builder had approval to build 19 floors, whereas it constructed 29 floors and cut down the super area, common area and other facilities. For the CCI to take any complaint further, its seven members have to say, prima facie, there is a case. On May 20, the CCI members did that and referred the case to its investigative arm, the Director General’s (DG) office.
Competition Act 2002 is an Act to provide for the establishment of a Commission to prevent practices having adverse effect on competition. It aims to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets. The main provisions can be summed up as follows:
Section 2 clause (f) of the Competition Act defines ‘consumer’
Section 18 of the Competition Act mandates that subject to the provisions of the Act, it shall be the duty of the Commission to protect the interests of consumers.
Section 19 sets out the procedure for enquiry by the Commission into alleged contraventions of the sub-section (1) section 3, anti-competitive agreements, sub-section (1) of section 4 abuse of dominant position.
The Central Government may appoint a Director General for the purpose of assisting the Commission in conducting an enquiry into contravention of any provisions of the Competition Act. The duty of Director General (‘DG’) is to assist the Commission to investigate into any contravention of the provisions of the Act, or any rules or regulations,
The Competition Commission of India has travelled a long distance since its enforcement work commenced in May 2009. One must account for the fact that it was a new authority and the Competition Act is a complex legislation combining law and economics. Thus, there was nothing unusual for the Commission to take time in understanding the import of the law and the economics principles embedded in it before it could enforce the law.
After the initial learning period, the Commission has in its recent decisions demonstrated greater certainty and a willingness to assert its mandate. Understandably, some of its orders have given rise to debate and controversy, which is not unusual. For example, in certain cartel decisions, one could raise questions about the finding that a collective action under the umbrella of the industry association did not amount to a cartel or that, if there was a cartel, it merited only token penalty. In the DLF case, on professional grounds, it is possible to challenge the soundness of some of the Commission’s decisions, for example, in the definition of the relevant market, in ignoring certain categories of customers while defining the relevant market, and in arriving at a finding of dominance in that relevant market based on incomplete data or on data outside the relevant market. However, the law still is in its infancy, and it is important to allow the jurisprudence to evolve over time, and see the Commission leverage its potential as a mature and sound competition authority.
Section 4 of the competition Act 2002 explains dominant position .Section 4(2)states that there shall be an abuse of dominant position if an enterprise or a group directly or indirectly, imposes unfair or discriminatory condition in purchase or sale of goods or service. It is also an abuse of dominance if any firm limits or restricts production of goods or provision of services or market. The entrepreneurs should not indulge in denial of market access, predatory pricing or use its strength in the market to its advantage.
The entrepreneurs should not try to reduce the free competition in the market. Competition policy has an objective of promoting consumer welfare. There should be undistorted competition in the market to deliver the best results to consumers. If the competitive process is restricted by anticompetitive agreements or unilateral action by the dominant firm in the market, then, consumers will be affected.
In order to find out whether a company has violated the Competition Act, the DG first identified its ‘relevant market’. Since the cost of each flat was above .1.5 crore, the DG concluded the relevant market was the “high-end residential market” in Gurgaon. The DG felt that DLF was able to get away with having an agreement stacked in its favour because it was a dominant player in the relevant market.
It also said the DLF did not inform buyers at the time of initial payment that the building plan was yet to be approved; and when customers wanted to exit, they had to encounter a large forfeiture amount. The DG submitted its report to the CCI members. The CCI has also asked the real estate company to modify unfair conditions imposed on buyers within three months of the date of receipt of the order. The CCI imposed penalty onthe DLF 7% of the company’s average turn during the last three financial years
While determining the penalty, the commission held DLF guilty of abuse of its dominant position pertaining to the basic need of housing. The points worthwhile are as follows
The CCI favors regulations for construction and found certain other practices listed below apparently followedin the industry to be objectionable and detriment to consumer interests:
On the fine imposed by CCI on DLF?
The Competition Commission of India’s (CCI) has imposed Rs 630-crore fine on DLF, India’s largest real estate company. The company was fined by the competition regulator for abusing its “dominant” position and treating home buyers unfairly. Actually, the CCI has objected to 15 different clauses contained in the agreement with DLF-Belaire residents and DLF namely;1) forfeiture of amounts paid by buyers in numerous cases of the agreements,2)the builder can change land use or layout plan and alter the structures unilaterally, 3) no exit option for the buyer except for non delivery of possession. This option merely entitles the buyer to refund of the amount paid without interest, 4) the builder would control all common areas and maintenance, etc.
The Competition Act of 2002, Sec. 4 prohibits an entity from abusing its dominant position in the market by directly or indirectly, imposing an unfair or discriminatory condition in purchase or sale of goods or services. The CCI has concluded that DLF has abused its dominant position in Gurgaon and its one sided agreements do adversely affect competition and imposed the fine.
The government has proposed RERA bill to protect the consumer’s interest on the one hand and to facilitate smooth and speedy urban construction on the other hand. There are many provisions made in the Bill which are as follows:
Establishment of a Real Estate Regulatory Authority: A proposal to appoint a chairperson with two other members supporting him with sufficient professional knowledge and experience in the field of public administration, urban development, finance, law or management.
Transparency and Powers of the Regulatory Authority: This authority is also going to maintain a website which will have the records of all real estate projects with all other details of the projects.
Registration with the Regulatory Authority: The builder/Developer has to file all the details of his project with the regulatory authority and provide all necessary details of property dealers.
Establishment of Appellate Tribunal: The bill has also to provide for the establishmentof an Appellate Tribunal, which will decide upon any dispute and will hear appeals against any decision of the Regulatory Authority
Obligations of a Promoter/Developer: The bill has also outlined the role of the property developer and their duties towards the regulatory authority and also the property buyers. The developer is obligated to provide all documents and information for inspection to the prospective buyers. The builder enters into a written agreement with the buyer before taking any advance money. After the execution of the agreement, the builder will not be entitled to create any third party charge on the plot, building or apartment, without the prior written consent of the buyer.
Offences and Penalties: To make the Act effective, there will also penal provision for who will not comply with its clauses. The penalties range from up to three years imprisonment for not registering a project or for not complying with the orders of the Appellate Tribunal to monetary penalties which may be ascertained on a daily basis for non compliance or as a percentage of the development costs or sale price.
The Bill seeks to bring fair, clarity and consistency in the fast growing Indian real estate sector. The proposed Act will lead to better information sharing and decision making, between builders and the consumers. Further, by seeking to establish the Regulatory Authority and Appellate Tribunal. Hence, after enactment of the Act, the real estate industry will have a better atmosphere leading to more transparent and responsible system between the builder and customer which really missing now.
The CCI has acted as a proxy for a real estate regulator. Doubts have been raised about the capability of a real estate regulator to be fair. Developers complain that getting approvals often takes years, which pushes up costs and consequently the prices. Developers must be given guidelines. One of the biggest problems afflicting the real estate industry is its high level of debt. The cost of funds of real estate companies is high depending on the credibility of the borrower. Because of the RBI regulations, banks have been wary of lending to real estate companies. In addition, companies have also been grappling with higher construction costs and prices of key inputs such as steel, cement, bricks and labour that have been rising. Higher interest rates has already created a slump
The CCI order has come as a huge boost to those looking for relief. There is a key difference between a consumer forum and the CCI. The CCI does not restrict itself to the actual damage caused to the complainant but rather looks at it from how it impacts or impedes a free and fair market. This is the reason why Parliament has empowered the CCI to impose penalties using economic yardsticks.
Often, consumer interest and public interest are considered synonymous. But they are not and need to be distinguished. Consumer is a broad class of people who purchase goods and services. They are distinguished from manufacturers, who produce goods and wholesalers or retailers, who sell goods.
Public interest, on the other hand, is something in which society as a whole has some interest. It is an externality. Many governmental policies are introduced in public interest which may not be in the ultimate interest of the consumers. If the consumer is at the fulcrum, consumerinterest and consumer welfare should have primacy in all governmental policy formulations. Therefore, there is a need to reconcile and balance consumer interest and public interest. Therefore, there is a need for bringing competition policy and consumer protection policy under an integrated framework. These two issues may not be dealt with by a single agency but there has to be sufficient coordination.
The CCI has also pointed out that the Centre as well as State Governments should come out with regulatory framework for the realty sector to protect consumers from unfair trade practices. There is absence of any single sectoral regulator to regulate the real estate sector. The regulator should ensure adoption of transparent and ethical business practices and protect the consumers. The Real Estate Regulatory Authority Act (RERA Bill) should be fast put into place. It should be a specialised domain knowledge-based regulator who would ensure that the consumer is protected both from the builder’s malpractices and callousness of the government. The creation of a regulator would establish a sense of responsibility among the developers towards the consumers. It is time that the Central government woke up to the fact that such reforms are inevitable in the urban sector. Sooner or later, these reforms will have to be enacted if the sector is to develop without the ambiguities and scandals.
The CCI found that the DLF had registered bookings for flats between August and November 2006, whereas the application for approval was submitted in December, and the clearance was obtained only in April 2007. Therefore if the developer starts selling before getting necessary approvals or sits on the project after getting all necessary clearances, he must be fined. Transparency is the need of the hour. If government makes all the records and documents-from land recordsto project completion certificates-available to the public a lot of ills will disappear. This is not done because the officials themselves benefit from the opaque mechanism. There is absence of faster methods of grievance redressal. The competition commission can only take up cases where there is monopolistic practice or anti-competition practices, and the DLF in this particular case is in that situation.
It is possible that there may be more such applications filed in the CCI, and therefore, it should not allow itself to be converted or treated as a consumer court. As the industry has over-leveraged itself with bad practices, the slowdown is imminent. It is important at this stage the consumer rights be protected. Without consumer confidence, the industry will find itself in trouble. The biggest problem for buyers is that they simply have no recourse and are at the builder’s mercy. Real estate remains a state subject and out of the Centre’s control. In most states, builders’ lobbies are in cahoots with local politicians and bureaucrats. The CCI decision has ushered a new regime in India. It shall change the way corporate India functions on a day to day basis. It is to be noted that some age old practices, which became customary in a particular sector because of inaction would be targeted. It is, therefore, imperative that the players understand the new law and update themselves regularly on the new policies and regulations.
www.grandmasters.in | 8 Years & Counting
www.rcls.in | 8 Years & Counting
www.itlegalsummit.com | 8 Years & Counting
www.bfls.in | 8 Years & Counting
www.maels.in | 8 Years & Counting
www.plcs.co.in | 8 Years & Counting
Copyright © 2020 Lex Witness - India's 1st Magazine on Legal & Corporate Affairs Rights of Admission Reserved
