India: Real Estate
This is an Insight article, written by a selected partner as part of GCR's co-published content. Read more on Insight
The residential real estate sector occupies an important position in India. The sector is the second-largest employer after agriculture and the fourth-largest in terms of foreign direct investment inflows.1 At present it is estimated that there are over 9,000 developers in the country, forming a very powerful lobby. With the number of housing projects rising exponentially, so too are the number of disputes between customers and builders regarding quality, penalties payable for delayed possession, the actual versus built-up habitable space, mandate of maintenance by the business, and other similar issues. Traditionally, such disputes found their way either to a civil court for breach of contract or to a consumer court for deficiency in services and occasionally to the Monopolies and Restrictive Trade Practice Commission as unfair or restrictive trade practice. The general feeling, however, was that buyers were to some extent at the mercy of developers, who invariably impose one-sided terms but fail to deliver on their promises.
This led a newly constituted regulator, the Competition Commission of India (CCI) to intervene in an attempt to address the grievances. Since 2009, the CCI has slowly but surely made its impact felt in various sectors of the Indian economy, from cement, to payment services, to passenger vehicles. In 2011, real estate came into its cross hairs. While there were many ‘hapless’ buyers who may have lauded the CCI, its enforcement has left legal practitioners puzzled about the jurisprudential developments and the interpretation of the Competition Act 2002 (the Act).
This article aims to provide a brief overview of the enforcement by the CCI in the real estate sector and address some of the important debates arising therefrom.
The dimensions of assessment
Like other antitrust regulators, the CCI is empowered to prevent practices resulting in an appreciable adverse effect on competition. It does this through the prohibition of anticompetitive agreements, the prohibition of abuse dominance, and merger regulation. The focus has, however, been markedly different in India when compared to antitrust enforcement in the United States, which has recently been battling with issues of cartelisation in the real estate brokerage industry,2 or the European Union, where the European Commission is yet to face behavioural concerns in the real estate segment. In contrast, the focus in India has been squarely on the perceived ‘unfairness’ of the clauses of the contract entered into between the builders and the final customers.
Abuse of dominance
In August, 2011 the CCI levied a penalty of 6.3 billion rupees on India’s largest real estate developer by market capitalisation, DLF Limited, for abusing its dominance in the market for high-end residential apartments in Gurgaon (a city approximately 30 kilometres from New Delhi, the capital of India) by imposing unfair and discriminatory conditions in the builder–buyer agreements (DLF Belaire).3 The decision brought to light a number of issues related to the application of competition law to the real estate sector, including the definition of the relevant market.
Parameters for the determination of the relevant market
Often, the most crucial factor in determining a case of abuse of dominant position is the assessment of the relevant market. Sections 19(6) and 19(7) of the Act state the factors by which the relevant market is to be determined. With respect to the real estate sector, the delineation of relevant market has been marred by apparent inconsistencies, rendering the determination of abuse debatable.
In its first decision, the CCI delineated the relevant product market as the market for services of the developer or builder, in respect of high-end residential accommodation; high-end being determined on the basis of the price of the residential units – in this case, apartments costing around between 20 million and 25 million rupees.4 Subsequent complaints to the CCI characterised the relevant product market on the basis of the price of the apartment; whether it is a high-end apartment,5 mid-tier residential accommodation6 or low-cost housing. However, after its decision in DLF Belaire, the CCI distanced itself from using price as the benchmark and went on to characterise the market on the basis of the product being sold (ie, residential apartments,7 units8 or plots).9
The issue remains unsettled, highlighting perhaps that the CCI is still struggling in the determination of what ought to be the relevant product market. This was markedly visible in the investigation instituted against another upcoming developer, Jaiprakash Associates Ltd, for abuse of its dominant position in the areas of Noida and Greater Noida (again, approximately 30 kilometres from Delhi).10 While the director-general (DG) of the CCI’s investigating branch initially reported back on the market for residential apartments in Noida and Greater Noida, in which it found Jaiprakash not to be dominant, the CCI directed it to look into the concept of ‘integrated townships’. With the market delineated in this manner, the DG returned a report of dominance. However, the CCI ultimately rejected this market definition,11 but only just, with two of the five members of the CCI dissenting.
The delineation of the relevant geographic market has also been a subject of much debate. The CCI in most of its orders has adopted a narrow definition of the relevant geographic market12 and this has been endorsed by the appellate tribunal (COMPAT).13 In most orders the CCI has limited the market to the city to which the complaint pertained.14 However, on occasion, the CCI has narrowed it down further by defining markets such as ‘New Town Kolkata’15 and ‘Suburban Chennai’.16
Real estate developers have consistently raised objections against such narrow definitions. Arguments of larger regions being considered by a prospective buyer and purchases being made solely for the purpose of investment have been raised at various junctures,17 but have not been accepted by the CCI. Regarding purchases made as investments, the CCI is of the opinion that in determining the geographic market it is ‘not looking at the concerns of speculators, but of citizens buying a residential property out of their hard-earned money or even by taking housing loans.’18 The logic and rationale for its acceptance are both questionable, as they seek to create an artificial divide in the relevant geographic market.
The CCI has, however, fluctuated with respect to its definition of the geographic market. In TDI Fun Republic Shop Owner Welfare Association v M/s E-City Property Management & Services Pvt Ltd & Ors,19 after many years of holding that the cities adjoining Delhi (Noida, Gurgaon and Faridabad) do not form part of one single geographic market when dealing with commercial spaces, the CCI nevertheless held that the entire region would be the relevant geographic market. This was determined on the basis of factors such as the reducing impact of distance and opportunities for investment, which were raised and rejected earlier with respect to residential spaces. Less than two months after this decision, in Mr Shyam Vir Singh v M/s DLF Universal Limited20 the relevant market was again delineated as Gurgaon, despite its holding in TDI Fun Republic.
The determination of dominant position
The factors for the determination of dominant position have posed an apparently significant challenge for the CCI. While market shares are normally determined on the basis of sales figures, this exercise is markedly difficult in the real estate sector. Should it be based on the number or the value of units, and further, should it relate to the units sold or those available for sale? The CCI initially used the value of units sold as the relevant parameter and explicitly rejected unsold inventory.21 However, in a later case the number of units launched has also been referred to.22 Market shares in the sector can also vary widely from year to year, depending upon the launch of a new project by a builder in a particular area. A new launch by a developer in a particular year can drastically impact the market shares, making the number or value of units an unreliable indicator. Moreover, unlike other markets, the number or value of units sold or launched will not typically be constant every year. Thus, while a developer may clock significant sales in one year, it may fall significantly behind when a competing project comes on the market in the next.
In addition to market shares, other factors used by the CCI for determination of dominant position are equally debatable. Questions remain over the treatment of liabilities, the possibility of potential competition, the relevant ‘land bank’ figure,23 and the relevant turnover to be examined in the case of multi-industry companies.
The determination of abuse
As referred to earlier, the abuses said to have been committed are with respect to the apparently unfair and one-sided conditions in the apartment buyer agreement and their implementation by builders. These abuses relate to penalties payable by the allottee in case of delayed payments, utilisation of increased floor area ratio, and unilateral changes by the builder in the plans, among others. One constant issue that arises here is determination of what is ‘unfair’ and the possibility of justifying the apparent unfairness of a clause on grounds of business necessity.24 Once adjudged dominant, any purported business justifications for the suspect clauses are likely to be rejected. As elucidated further below, this appears to stem more from the general perception that buyers are at the mercy of builders for their homes rather than any factual basis in law. As these clauses are standard industry terms, a developer found dominant may take it for granted that the CCI will find the clauses to be abusive in nature.
The unlikely cartel
The similarity between many developers’ terms of agreement has also led to a complaint being filed before the CCI, alleging that various real estate companies, using the platform of the Confederation of Real Estate Developers in India (CREDAI), had entered into an ‘understanding’ that they would all adopt similar anticompetitive clauses – a violation of section 3 of the Act.25
The CCI directed an investigation into the matter and the DG came to the highly questionable conclusion that while CREDAI was not a platform, various real estate developers were in fact acting in contravention of section 3 of the Act merely by setting identical or near-identical terms in their agreements.
The final order of the CCI expounds its general feeling with respect to the sector, noting that the real estate players are following practices that ‘leave the consumers to fend for themselves’,26 and that they ‘strongly recommend that not only the parties investigated but all the players in the sector take appropriate voluntary measures to address the concerns projected’,27 and ‘all players are competing to provide consumers the option to compare “one rotten apple with another rotten apple”.’28 Despite this, the CCI closed the case, holding that there was insufficient evidence to prove that the similarity in clauses was a result of any concerted action.
The fundamental conundrum of jurisdiction
The CCI’s intervention in the agreements between the builder and the final consumer raises a long-standing question of the kinds of conduct intended to be covered by the Competition Act. All the complaints before the CCI invariably involved allegations that the builder abused dominance by imposing onerous and one-sided conditions on the consumer. Clearly, these allegations were far from highlighting any appreciable adverse effect on competition or raising any exclusionary concerns. Arguably, purely exploitative conduct also falls within the scope of competition law enforcement. But the application is tricky. Between 1980 and 2010, the EC reportedly found 40 cases of exclusionary abuse, as opposed to only 11 cases of exploitative abuse.29 Moreover, even in these 11, the analysis seems to focus on the effect on competitors or other market participants rather than on the final consumer.30
While the CCI has always tended towards a consumer-friendly approach, it appears to have allowed this to permeate into the analysis. A consumer-centric approach was maintained by the CCI in DLF Belaire,31 but it also raised the question of whether it was intended that the CCI exercise its powers in relation to acts without any demonstrable effects on competition. Further, how does this exercise reconcile itself with powers vested in other bodies such as the statutory bodies that act in each state in India, the consumer court, a special tribunal set up under the Consumer Protection Act, 1986, and the civil courts, exercising jurisdiction over contractual disputes.32 Notwithstanding the CCI’s laudable efforts to provide redress, the Competition Act is arguably intended to benefit the consumers by protecting competition in the marketplace.33 The CCI was clearly assigned the task of regulating market practices, which was in clear distinction to the functions assigned to the consumer grievance redressal fora.34 The legislature ensured a clear separation of powers between the two institutions, setting up a completely different entity to specifically regulate competition in the market. Unlike Australia, the US or Ireland, where the antitrust and consumer protection functions are exercised by the same authority,35 there is strict division of powers between the consumer fora and the antitrust regulator in India. Both authorities work towards the similar goal of protection of consumer interests; however, under the antitrust laws, the CCI is expected to dispense the said function by way of regulating competition in the market. The CCI in its recent orders has, however, disregarded the said division and observed that such complaints do not entail examination of the ‘breach of the terms/conditions specified in the builder–buyer agreements but the way in which a dominant player conducts itself while dealing with the buyers’.36 The CCI strongly maintains that the availability of remedies before consumer fora does not oust its jurisdiction, given that the provisions of the Act are ‘in addition to, and not in derogation of’, the provisions of any other law.37
However, the CCI’s motto of ‘changing the way in which the real estate developers function’38 has been its justification for exercising its powers in relation to these ‘unfair’ terms. However, in addition to the lack of a showing an effect on competition and the jurisdictional overlaps, the exercise also results in confusing, and possibly paradoxical, outcomes.
Impact on the real estate sector
It is obvious that the CCI has, through its order in DLF Belaire and its observations in other cases,39 made it amply clear that there are practices being followed by the real estate developers that it strongly disapproves of. But what has this resulted in for buyers as well as builders?
One of the most obvious concerns for real estate companies is not just the possibility of a penalty imposed by the CCI, but also the possibility of huge compensation claims arising out of the order of the CCI.40 Though any such compensation claim is yet to be adjudicated on, they do pose a significant financial risk for companies found to be in contravention of the Act.
Moreover, in DLF Belaire, the company was directed by the CCI to suitably modify the terms it found to be unfair and passed a supplementary order, suggesting modifications to the clauses of the agreement so as to make it compatible with the Act. Although the revised clauses suggested in the supplementary order were recommendatory in nature,41 they provided some guidance to real estate players of what would be considered to be appropriate before the regulator.
However, this leads to paradoxical results. Whereas DLF was bound to modify its terms, this was applicable only to the city of Gurgaon, where it was held dominant; the CCI has dismissed similar complaints against the company in other cities, noting that the company does not possess the necessary market power in those relevant geographic markets. The result is to provide ‘fairer’ terms to consumers in Gurgaon that could arguably only serve to enhance its market position in the city rather than increase competition. Whether this will have a knock-on effect on competitors who feel obliged to change their terms as well remains to be seen.42
The directions of the CCI do not apply to the vast majority of companies operating in different cities and these non-dominant players can continue with the terms and conditions. The CCI appears to be cognisant of this fact, which to an extent explains its request to the government to introduce a suitable real estate specific regulator to look into these issues.43 Such a move is already on the anvil with the introduction of the Real Estate (Regulation and Development) Bill 2013 (the Bill). The Bill creates a framework for the Real Estate Regulatory Authority that will act as the central nodal agency for promoting transparency, efficiency and competitiveness in the real estate sector. The proposed legislation also contemplates speedy adjudication of disputes to protect the interests of the consumers and ensure greater accountability of the real estate players. If passed, it is likely to be argued that the CCI has no jurisdiction remaining in the real estate sector, at least insofar as exploitative acts are concerned.
With numerous challenges to its jurisdiction, the difficulties of assessment and the apparent accepted inability of the CCI to address the issues, regulation by the CCI in this sector has raised important talking points at both legal and policy levels. Regulatory activism, driven solely by a desire to protect consumer interests, calls for some deliberation. The CCI till now had assigned itself the duty of regulating the competitiveness of and exploitation by the real estate companies. After a new regulator emerges, it will be interesting to witness a fresh approach adopted by the country’s antitrust regulator that might automatically lean towards ceasing all regulatory functions in respect of the real estate sector, or at the very least restrict itself to the ‘hard-core’ violations of cartel conduct or vertical agreements with other market participants in the chain.
- See generally, Indian Real Estate Industry Analysis, available at: www.ibef.org/industry/indian-real-estate-industry-analysis-presentation. last visited 8 December 2015.
- United States Department of Justice, Competition and Real Estate, available at www.justice.gov/atr/competition-and-real-estate-0; Norman W. Hawker, Competition in the Residential Real Estate Brokerage Industry: A Report on the AAI Symposium, available at: www.antitrustinstitute.org/files/517b.pdf.
- Belaire Owners’ Association v DLF Limited, HUDA & Ors, Case No. 19/2010, order dated 12 August 2011 (DLF Belaire).
- COMPAT, in its order in the appeal against the DLF Belaire order, found that 20 million to 25 million rupees would in 2006–2007 be a ‘high-end’ apartment in the Indian socio-economic reality (DLF Limited v CCI & Ors, Appeal No. 20 of 2011, order dated 19 May 2014 at paragraph 60) (DLF COMPAT).
- In M/s Magnolia Flat Owners Association & Ors v M/s DLF Universal Limited & Ors, Case No. 67/2010, order dated 21 January 2012 and DLF Park Place Residents v DLF Limited, Case Nos. 18,24,30,31,32, 33,34 & 35/2010, order dated 29 August 2011 and in Mr Jagmohan Chhabra & Ors v M/s Unitech Ltd, Case No. 21/2011, order dated 8 November 2011, the CCI defined the relevant market as market for high-end residential apartments. Interestingly, the price of the apartments in Mr Jagmohan Chhabra & Ors v M/s Unitech Ltd, was 9.5 million rupees, creating the issue of determination of price range for ‘high-end apartments’.
- Amit Mittal v M/s DLF Limited, Case No. 73 of 2015, order dated 4 February 2014, which definition however was not accepted by the CCI and they characterised the relevant market as the market for sale and development of residential units.
- See Mr Ashutosh Bhardwaj v M/s DLF Limited & Ors, Case No. 01/2014, order dated 27 February 2014, Mr Jagmohan Chhabra & Ors v M/s Unitech Ltd, Case No. 27/2011, order dated 8 November 2011 (passed within four months of the DLF Belaire order).
- See supra No. 6 at paragraph 9, in which the CCI explicitly stated that it ‘considers it inappropriate to segregate the market into high-end/middle end, mid-tier etc….’
- See Ms Aanchal Khetarpal v Jaiprakash Associates Ltd, Case No. 56/2014, order dated 24 September, 2014; Shri Deepak Kumar Jain v M/s TDI Infrastructure Ltd & Ors, Case No. 40/2014, order dated 29 April 2014.
- Sunil Bansal & Others v M/s Jaiprakash Associates Ltd & Others, Case Nos. 72 of 2011; 16, 34 & 53 of 2012; and 45 of 2013, order dated 26 October 2015 at paragraph 16.
- Interestingly, the CCI had in the past already rejected this delineation of the market. In Shri Sunil Chowdhary v M/s TDI Infrastructure Ltd & Ors, Case No. 27/2014, order dated 23 September 2014, and in Shri Deepak Kumar Jain v M/s TDI Infrastructure Ltd & Ors, supra No. 9, the CCI had declined to accept the relevant market as the market for integrated townships, observing that while, ‘integrated townships do offer some different characteristics than other forms of plotted residential units but it cannot be considered as separate relevant product market in the present case as contended by the Informants.’
- Illustratively, in DFL Belaire supra No. 3 and Sunil Bansal & Others v M/s Jaiprakash Associates Ltd & Others, supra No. 10 , despite arguments made to the contrary, the geographic market has been extremely limited in its scope regarding Gurgaon, Noida and Greater Noida, respectively.
- Supra No. 4.
- Illustratively, Shri Siddhartha Upadhyaya & Ors v Shri Sushil Ansal and Shri Pranav Ansal, M/s Ansal Proprieties & Industries Ltd, case No. 78/2014, order dated 23 December 2014 (Noida and Greater Noida); Shri Girish Batra v M/s BPTP Ltd & Ors, Case No. 42/2010, order dated 16 December 2010; Mr Gautam Dhawan v M/s Parsvanath Hessa Developers Pvt Ltd & Ors, Case No. 69/2014, order dated 29 January 2015 (Gurgaon); Ravinder Kaur Sethi v DLF Universal Limited & Ors, Case No. 85/2014, order dated 29 January 2015 (Delhi) (Faridabad).
- Anonymous v Bengal Greenfield Housing Dev Co Ltd & Ors, Case No. 103/2013, order dated 12 February 2014.
- George Kuruvilla, Chennai & Ors v M/s Hirco Developments Pvt Ltd, Mumbai & Ors, Case No. 67/2011, order dated 9 February 2012.
- See DLF Belaire, supra No. 3, DLF COMPAT, supra No. 4 and Sunil Bansal & Others v M/s Jaiprakash Associates Ltd & Others, supra No. 10.
- DLF COMPAT supra No. 4 at paragraph 88.
- Case No. 05/2014, order dated 2 April 2014, where at paragraph 19 the CCI notes: ‘it is not uncommon for a shop buyer located in Delhi to buy a retail space in an upcoming mall in Noida/Gurgaon if the returns look attractive enough as travelling/transportation costs are coming down due to introduction of metro, BRT system, new flyovers, underpasses etc’.
- Case No. 24.2014, order dated 23 June 2014.
- Illustratively, in DLF Belaire, supra No. 3.
- Sunil Bansal & Others v M/s Jaiprakash Associates Ltd & Others, supra No. 10, paragraph 17 and dissent note at paragraph 55.
- Land bank may be considered as the total area of land owned by an entity. There were doubts raised over the treatment of land bank in Sunil Bansal & Others v M/s Jaiprakash Associates Ltd & Others, supra No. 10, paragraph 43.
- DLF in DLF Belaire attempted to justify certain clauses on the basis of business justification, however they were not accepted by the CCI.
- Shri Jyoti Swaroop Arora v M/s Tulip Infratech Ltd & Ors, Case No. 59/2011, order dated 3 February 2015 (CREDAI order).
- Ibid at paragraph 351.
- Ibid at paragraph 359.
- Ibid at paragraph 351.
- Hubert & Combet, ‘Exploitative Abuse: the end of the paradox?’, Concurrences Nos. 1–2011, pages 44–51.
- The CCI in DLF Belaire opened its order with ‘The case under consideration concerns competition issues and consumer interests in the residential real estate market in India.’ Further at paragraph 12.46, it observed that: ‘(T)he preamble of the Competition Act and section 18 mandates the CCI to “protect the interest of consumers” and it is important to ensure that consumers’ surplus is not adversely impacted.’ The CCI at paragraph 12.102 further held that ‘the brutal disregard to consumer right (that) has been displayed’ by the abusive clauses.
- The Monopolies and Trade Restrictive Practices Commission also looked into similar cases of unfair conditions imposed by the builders.
- Abstract from the parliamentary discussions on the Competition Bill 2001.
- Preamble of the Consumer Protect Act provides for ‘better protection of the interests of consumers and for that purpose to make provision for the establishment of consumer councils and other authorities for the settlement of consumers’ disputes and for matters connected therewith’
- United States Federal Trade Commission, Competition & Consumer Protection Authorities Worldwide, available at www.ftc.gov/policy/international/competition-consumer-protection-authorities-worldwide.
- Mr Pankaj Aggarwal (13/2010), Mr Sachin Aggarwal (21/2010) & Mr Anil Kumar (55/2012) v DLF Gurgaon Home Developers Private Limited, order dated 12 May 2015.
- See Sunil Bansal & Others v M/s Jaiprakash Associates Ltd & Others, supra No. 10 at paragraph 69.
- ‘Starting to make a difference in India trade practices: CCI’ Aug 28, 2014 available at www.moneycontrol.com/news/economy/starting-to-makedifferenceindia-trade-practices-cci_1165230-0.html.
- See CREDAI order, supra No. 25 at paragraph 351 to 359; Sunil Bansal & Others v M/s Jaiprakash Associates Ltd & Others, supra No. 10, see generally paragraphs 113, 114 and 115.
- Section 53N of the Act empowers COMPAT to grant compensation to affected persons in cases where the CCI has found a contravention of the Act.
- It is relevant to note that COMPAT, in the order dated 12 February 2013, in Appeal No 20/2011, observed that the the modifications suggested in the Supplementary Order are only suggestions and do not have a binding nature.
- In the CREDAI order the CCI has observed that: ‘the sector suffers from inertia generated due to lack of competitive pressure which would force the players to offer better services and fair terms.’ Supra No. 25 at paragraph 353.
- Supra No. 25 at paragraph 357.