How CCI arrived at DLF penalty verdict?
Tuesday's order of India's competition regulator against India's largest real estate firm is a culmination of a 15-month battle. During this period, the Competition Commission of India (CCI) heard arguments of four parties — house buyers, DLF, and two Haryana urban planning authorities — on 12 occasions and went through 21 written submissions, running into many hundreds of pages.
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 of building plans without approval.
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. The DG structures its investigation around three questions.
WHAT IS THE RELEVANT MARKET?
In order to find out whether a company has violated the Competition Act, the DG first identifies 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. It argued a customer wanting a flat in Gurgaon would not look at Noida or another city; and that a small change in price — say, 5% — will not make buyers in Belaire shift to lowerpriced flats under development in Gurgaon.
WAS DLF THE DOMINANT PLAYER ?
No public data was available on residential sales in Gurgaon. According to the CCI's 237-page order, neither DLF nor a real estate consultant engaged by the company, Jones Lang LaSalle Meghraj, gave any data to the CCI. The DG relied on data from the Centre for Monitoring Indian Economy (CMIE), an economic think-tank.
On an all-India basis, the DG's report says DLF had a market share of 40% in 2007-08 and 33% in 2008-09. In Gurgaon, its market share exceeded 65% in those two years. DLF contested this figure. It said a more reliable indicator was 'active stock' — the number of units available in the market for sale. Further, it said DG's methodology was wrong, as it considered the all-India sales of companies that are operating in Gurgaon.
DG also considered the turnover, profits (both cash and net profit), size of capital assets and economies of scale (history of operations, large land bank) to conclude DLF is a dominant player. DID DLF MISUSE ITS POSITION? The DG's report focused on terms of the buyer's agreement for the Belaire project.
It argued 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 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, who shared it with the four parties. After hearing their arguments, the CCI ruled DLF guilty and asked it to pay Rs 630 crore as penalty.
Source: Economic Times
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