Impact of the DFL case on the real estate sector

By Amitabh Chaturvedi and Kamakshi Hora, Mine & Young
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The year 1991 was a watershed. A financial crisis provoked the government to open up the economy for the first time, allowing privatization, private investment in previously closed sectors, liberalization of international trade, and other reforms. The Monopolies and Restrictive Trade Practices Act, 1969, was found to lack provisions to deal with anti-competitive practices in an era of globalization and liberalization and was later replaced by the Competition Act, 2002.

The Competition Act was challenged and amended in 2007 in light of decisions of the Supreme Court. The provisions pertaining to “anti-competitive agreements” and “abuse of dominant position” took effect in May 2009, and those regulating “combinations”, i.e. mergers and acquisitions, took effect in June 2011.

Amitabh Chaturvedi
Amitabh Chaturvedi

Huge penalty imposed

On 12 August 2011, the Competition Commission of India (CCI), the regulator under the act, in Belaire Owners’ Association v DLF Limited and HUDA, imposed a penalty of ₹6.3 billion (US$115 million) on the real estate giant DLF for abuse of dominant position through unfair conditions in its contracts with flat buyers, and directed DLF to “cease and desist” from framing and imposing such unfair conditions and to modify them within three months.

The penalty imposed on DLF has been calculated as 7% of its average group turnover for the past three fiscal years and is the heaviest penalty imposed by the CCI to date. The CCI, by this order, advised the central and state governments to draft stringent and deterrent laws for the real estate sector.

Repercussions expected

This order is expected to have vast repercussions in the real estate domain, which has been buffeted by high inflation and hefty home loan rates. Project delays are often beyond the control of the developers and stringent conditions imposed by the CCI or the courts could seriously harm the real estate sector.

This order is noteworthy because: (1) it is the first time that competition law has targeted the manipulative nature of “abuse of dominant position”; (2) it overtakes the well-known concept of “unfair trade practices”, usually applied in cases of consumer disputes; (3) it brings to the fore the wrongful practices of builders that receive the money from buyers for one project and then siphon it away for other projects; and (4) it shows that CCI decisions follow US and EU case precedents while the methodology adopted to calculate hefty penalties lacks foundation in the specific provisions of the act.

The real estate sector should comprehend that the competition law will promote efficiency in the country’s economy by preserving free and fair competition in the market, which will benefit both companies and their clients. Competition encourages organizations to be more efficient thereby reducing the cost of products and services. This, in turn, improves quality and increases the demand for the products and services.

Kamakshi Hora
Kamakshi Hora

Thus, the real estate sector should welcome the competition law and ensure compliance with the law. Agreements should be drafted keeping in mind the provisions of the act.

As mentioned above, the act does not provide for severe monetary penalties, and the penalty imposed on DLF by the CCI appears exorbitant by conservative Indian standards. However, apart from imposing liability on a company, the act also empowers the CCI to levy personal liability on the senior management. Further, more than 110 countries have adopted competition laws and some 20 more are in the process of doing so. Therefore, a competition compliance programme (CCP) should be incorporated in the preamble of every enterprise’s risk management strategy.

Compliance programme

The key requirements of a CCP are: (1) educating employees about the basic concepts of competition law and the kind of conduct that violates it; (2) creating a system which will detect any anti-competitive activity; and (3) training employees in the best practices for dealing with investigations by the CCI in case of an unintended violation.

The CCP should provide for identifying possible violations so as to take proactive, corrective and remedial steps. Effective compliance not only helps to reduce the risk of violations but also facilitates timely detection and can be useful in mitigating penalties by disclosing information about any violations at the first opportunity.

Builders’ associations can play a pivotal role in educating their members about competition compliance. In many countries, builders’ associations have provided standard pro forma contracts that are relatively easy to understand. Therefore, national trade associations such as the Confederation of Real Estate Developers’ Associations of India and the Builders’ Association of India, which have nurtured the country’s real estate industry, should adopt a competition- friendly draft agreement for the betterment of their members.

Amitabh Chaturvedi is the managing partner of Mine & Young, where Kamakshi Hora is an associate.

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