Missing links: the DLF order

By Suchitra Chitale, Chitale & Chitale Partners
0
539

On the 12th of August the Competition Commission of India (CCI) imposed a penalty of ₹6.3 billion (US$126 million) on a major real estate developer, DLF, for abuse of dominant position.

The CCI began its enquiry under section 4 of the Competition Act, 2002, on receiving a complaint from an apartment owners’ association. The complaint alleged that DLF was abusing its dominant position by including discriminatory and abusive clauses in the allotment agreements.

Suchitra Chitale Partner Chitale & Chitale Partners
Suchitra Chitale
Partner
Chitale & Chitale Partners

Taking a close look

On finding that there existed a prima facie case of abuse of dominant position, the CCI directed the director general (DG) to investigate into the matter.

The DG concluded that DLF has a dominant position as it enjoys an economic advantage over other players operating in the market. As such it can operate independently of competitive forces and can also influence consumers in its favour. The DG concluded further that DLF has abused its dominant position by imposing costly exit options, one-sided agreements and unfair conditions on the consumers.

Weighing up facts

After considering the DG’s report and hearing both parties, the CCI concluded that the relevant geographic market in this case is Gurgaon and the relevant product market is the market for high-end apartments. The CCI agreed with the DG’s opinion that DLF had abused its dominant position.

In addition to imposing a fine of ₹6.3 billion, the CCI passed a cease and desist order directing DLF not to formulate and impose unfair conditions in its agreements with buyers in the city of Gurgaon and to modify the conditions of the existing agreements within three months of the date of receipt of the order.

Critique of the order

A detailed review of the order shows that the CCI had based its conclusions on erroneous findings. The CCI erred in holding that Gurgaon was the relevant geographical market. The test of substitutability for luxury apartments could not have been the basis for determining the relevant geographical market.

The CCI further erred in not appreciating the distinction between those who purchase property for residential use and those who purchase it as an investment. This is significant as the relevant product market does not consist only of the residential market, but also the market for investment, appreciation and rentals.

The CCI further failed to note that DLF was not holding a dominant position within the meaning of section 4 explanation (a) of the Competition Act. Further, there was no basis to assume that it was operating independent of competitive forces. The existence of a large number of real estate companies offering high-end residential premises constituted competitive forces in the market. There was nothing to show that DLF’s conduct had resulted in the elimination of competition.

Erroneous conclusion

The CCI’s finding that DLF was abusing its dominant position is not based on cogent reasoning. In the absence of any finding on the relevant indications of abuse, such as predatory pricing or refusal to supply, it would be incorrect to conclude that DLF was abusing its dominant position so as to have an appreciable adverse effect on the market.

If the CCI had come to the same conclusion citing lack of exit options for apartment buyers due to the alleged restrictive conditions in the buyer’s agreement, it could at best have been a case of restrictive conditions in a contract. This is because the imposition of unfair conditions in the purchase or sale of goods or services by itself is not proof of the abuse of a dominant position.

Further, there is nothing to show that the competitors (other real estate companies) in the market do not adopt similar practices or that such practices are perpetrated by DLF alone.

The CCI was also wrong in how it computed the fine, which amounts to 7% of the average turnover of the entire business of DLF for the three preceding financial years. As the fine is for an alleged abusive act in relation to one building complex, if a penalty was to be imposed it should have been on the basis of either the turnover in relation to the particular project, i.e. Belaire Residences, or the turnover of DLF in the relevant geographical market, which is Gurgaon. Imposing the fine on the basis of DLF’s entire turnover with respect to all its businesses across India is incorrect.

DLF has appealed to the Competition Appellate Tribunal against the order.

Suchitra Chitale, the managing partner of Chitale & Chitale Partners, heads the competition team of the firm, which advises and acts on the behalf of clients in Indian competition law matters. She has been in practice for more than 24 years.

[INSERT LOGO OF CHITALE & CHITALE]

C-83, Neeti Bagh

New Delhi – 110049, India

Tel: +91 11 4164 2965 / 66 / 67

Fax: +91 11 4164 2964

Email: [email protected]