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CompLR<br />
COMPETITION LAW REPORTS<br />
Consulting Editors<br />
Dr. S. Chakravarthy G R Bhatia Amitabh Kumar<br />
Former Member, Luthra and Luthra J. Sagar Associates<br />
MRTP Commission Law Offices New Delhi<br />
Adviser/Consultant<br />
New Delhi<br />
Associate Editors<br />
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Luthra & Luthra<br />
Law Offices, New Delhi<br />
Archana Rajaram<br />
Nishith Desai Associates<br />
Mumbai<br />
Ravishekhar Nair<br />
Luthra & Luthra<br />
Law Offices, New Delhi<br />
Mansoor Ali Shoket<br />
J. Sagar Associates<br />
New Delhi<br />
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Contents<br />
Section A<br />
Case Laws<br />
COMPETITION COMMISSION OF INDIA<br />
Belaire Owner’s Association v. DLF Limited and Haryana Urban<br />
Development Authority, Department of Town and<br />
Country Planning, State of Haryana at page 0239<br />
Case No. 19 of 2010, Decided on: 12.08.2011<br />
MANU/CO/0044/2011<br />
Definitions of “Consumer” and “Service” — Sections 2(f) and 2(u) of the<br />
Competition Act — Whether scope wider than the definition of these terms<br />
provided in Consumer Protection Act, 1986 — Real estate dealings or housing<br />
construction always taken as service whether it be MRTP Act or Consumer<br />
Protection Act or Finance Act — Competition Act applies to all the existing<br />
agreements — Covers also those entered into prior to the coming into force<br />
of Section 4 but sought to be acted upon now — Section 4 makes<br />
responsibility of the dominant player more onerous<br />
Relevant market — Meaning — Section 4 read with Sections 2(r), 19(5),<br />
19(6) and 19(7) of the Competition Act, 2002 — Relevant market is the<br />
market for services — In instant case means services of developer/ builder<br />
in respect of high-end residential accommodation in Gurgaon<br />
Dominant Position — Abuse thereof in relevant market — Section 4 read<br />
with Section 19(4) of the Competition Act, 2002 — DLF in instant case enjoyed<br />
the position of market leader in the real estate sector in general, and in the<br />
relevant market in particular — A relevant factor under Section 19(4)(m) to<br />
hold its dominant position in the relevant market<br />
Abuse of Dominant Position — DLF by far the oldest and leading real<br />
estate service provider — A trend setter of various which over a period of<br />
time could be considered as “industry practices” — Industry practice cannot<br />
be a defence for anti-competitive practices/ conduct — No defence of having<br />
adopted an industry practice for practices, found to be anti-competitive<br />
and / or abusive can be claimed — DLF Ltd. was held to be in contravention<br />
of Section 4(2)(a)(i) of the Competition Act<br />
5
ii<br />
Competition Law Reports [Vol. 2<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial<br />
Services Limited (IFSL) at page 0239<br />
Case No. 12/2010, Decided on: 22.03.2011<br />
MANU/CO/0009/2011<br />
Dhanendra Kumar (Chairman), H.C. Gupta, P.N. Parashar, Dr. Geeta Gouri,<br />
Anurag Goel and M.L. Tayal (Members)<br />
Anti-competitive Activities — Referral — Investigation — Whether the<br />
pre-payment penalty and foreclosure charges levied by IFSL on Informant<br />
on closure of the said loan account prior to the date of maturity were<br />
anti-competitive and whether by levying foreclosure charges and<br />
pre-payment penalty, IFSL had violated any of the provisions of Section 3<br />
and/or Section 4 of the Competition Act, 2002 — Levy of pre-payment<br />
penalty and foreclosure charges is a widespread practice among banks —<br />
Such charges hindered free movement by borrowers — On examination of<br />
the internal circulars of the banks — Levy of such charges were to deter<br />
competition — Presence of anti-competition.<br />
Abuse of Dominant Position — Demand of foreclosure charges and prepenalty<br />
for the unexpired period of loan by OP — Detrimental to competition<br />
amongst banks — Prevents the borrower from switching over to other<br />
banks — Act contrary to Sections 3(1), 3(2), 3(3) (a), 3(3) (b), 4(1) and, 4(2)(a)(i)<br />
of the Competition Act, 2002 — On consideration of the report of DG no<br />
dominance proved — Lack of relevant evidence.<br />
Investigation report furnished to parties — Imposition of charges does not<br />
violate the Act — Investigation report does not have any evidence to suggest<br />
presence of any agreement with other banks or financial institutions —<br />
Company registered under the Companies Act, 1956 and engaged in<br />
provision of financial services — Activities performed were covered in the<br />
definition of “enterprise” under Section 2(h) of the Act — For application of<br />
Section 3(3)(b) there must be two or more enterprises engaged in identical<br />
or similar trade of goods — No such requirement proved — No concerted<br />
activities reported by DG — No violation of either Section 3 or Section 4 of<br />
the Act established — Proceedings closed.<br />
R. Prasad, (Dissenting Opinion)<br />
Mortgage loan — Levy of pre payment penalty anti competitive — Cartel<br />
like behaviour — Contradicts provisions 3(1), (2) and (3)(a) and (b) as well<br />
as 4(1), (2)(a)(i) of the Competition Act, 2002 — Detrimental to competition<br />
amongst financial institutions — Although a single complaint, but one of<br />
class action — Proved to be in contravention of the Act — Practice to be<br />
stopped.<br />
Section B<br />
DR. S. CHAKRAVARTHY,<br />
IAS (Retd), presently<br />
Advisor/Consultant on<br />
Competition Law &<br />
Policy. Consultant to<br />
World Bank, ADB etc.<br />
6<br />
The Tripod of Independence, Expertise and Accountability<br />
of a Regulator – An Analysis of the Indian<br />
Competition Law at page B-209<br />
This is the second part of the three part Article on Independence,<br />
Expertise and Accountability of Regulators. The first part appeared<br />
in the May-June issue. The third and final part will appear in the<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)
2011] Index<br />
iii<br />
next issue, September-October 2011. References will appear in<br />
September-October 2011 issue.<br />
In this part, the author says that in order to effectively and efficiently<br />
discharge its duties, a regulator, perforce, needs some degree of<br />
freedom to be provided by the statute creating it. This degree of<br />
freedom or independence should not be absolute but should be<br />
circumscribed by the laws of the land and the policy of the<br />
government.<br />
Institutional independence is imperative for the regulator to<br />
perform the challenging task of maintaining a judicious balance<br />
amongst conflicting interest and maintaining an arm’s length<br />
relationship from interest groups. The statutes creating the<br />
institutional regulators may or may not explicitly mandate<br />
independence for them. In reality and practice, many regulators<br />
lack the requisite functional and organisational autonomy to be<br />
genuinely independent.<br />
CHANDRASHEKHAR A.C.<br />
Student, HNLU,<br />
Raipur, (C.G.)<br />
and<br />
SUMANGALA A.C.,<br />
Student, Karnataka<br />
State Law University,<br />
Dharwad<br />
Analysis of Merger Regulation with Special Emphasis<br />
on the Civil Aviation Industry at page B-223<br />
Mergers are a feature of a growing and vibrant economy.<br />
Throughout the past century, there has been proliferation of<br />
competition laws across the globe, and most of these jurisdictions<br />
realise the anti-competitive effects a merger may result into and<br />
therefore, they have merger control mechanisms. The Indian<br />
Companies Act does not contain a definition of mergers. In simple<br />
terms, a merger is, for example if there are two companies, A and<br />
B, they may merge to form C or may merge to become B or may<br />
merge to become A.<br />
Firms have various reasons to merge and mergers do not<br />
necessarily have a negative impact on the market. In fact, they<br />
play a very vital role in growth of the market and in increasing<br />
efficient utilisation of resources. It has to be seen that what is greater,<br />
the anti-competitive aspect or the benefits that will ensue. This is in<br />
nutshell the criteria of all merger review mechanisms. Competition<br />
law in India is a recent phenomenon. Legislative history shows<br />
that we have had not much of the merger control process for<br />
examining anti-competitive aspects of mergers.<br />
Competition is the lifeblood of any economy. If there is no<br />
competition in the market, the market will decay. Which is why,<br />
competition in the market needs to be preserved. Competition has<br />
two-fold effects on the market, firstly, it is favourable to the<br />
consumer and secondly, it keeps the market efficient, i.e. it generates<br />
productive efficiency, allocative efficiency that leads to better<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)<br />
7
iv<br />
Competition Law Reports [Vol. 2<br />
utilisation of resources and dynamic efficiency that leads to<br />
innovation.1 It favours the consumer because it ensures that price<br />
and the quality of goods and services offered to the consumer are<br />
determined by market forces and not on the whim of the seller,<br />
hence saves the consumer from being exploited. Further, it also<br />
serves the freedom of trade an economic counterpart of political<br />
democracy. It preserves pluralism and distribution of market power<br />
thereby countering the concentration of wealth into a few hands.2<br />
Not only by modern economists but also by classical economists,<br />
competition has been fundamental to the price formation of<br />
consumers’ goods and of the land, labour and capital that produce<br />
them. A competitive process equates quantities supplied and<br />
demanded and sets the prices at equilibrium or near equilibrium<br />
levels. Moreover, it apportions capital and labour amongst<br />
entrepreneurs so that the expected rate of return is almost equal<br />
among different users. Modern economists also recognise it as a<br />
process for economic growth. For example, Von Hayek argues<br />
that it is only through competition producers may know what the<br />
most efficient methods are; he calls it a process of creative<br />
destruction that revolutionises the economic structure from within,<br />
incessantly destroying the old one, incessantly creating a new one.<br />
ANAMIKA AHIR<br />
Student, National<br />
Law Institute<br />
University, Bhopal<br />
An Appraisal of India’s New Merger<br />
Control Regime at page B-236<br />
The new merger regime enforced on 1st June, 2011 by Ministry of<br />
Corporate Affairs is a comprehensive set of regulations. The article<br />
attempts to critically examine the regulations along with its practical<br />
implications on the Indian markets.<br />
KAUSHAL KUMAR<br />
SHARMA, Advisor<br />
Commr. of Income<br />
Tax, Ministry of<br />
Finance, Government<br />
of India, and former<br />
Director General &<br />
Head of Merger<br />
Control, CCI<br />
Treading the Thin Wedge between “Unfair Trade Practices”<br />
and “Abuse of Dominant position” at page B-241<br />
On 12 th August, 2011, the Competition Commission of India (CCI),<br />
by an order under Section 27 of the Competition Act, 2002 (the<br />
Act), held the DLF Ltd guilty of abuse of dominant position under<br />
the Act and imposed a penalty of Rs. 6,300 million. After holding<br />
the concerned enterprise guilty of abusing its dominant position,<br />
the CCI had the option of levying a penalty of up to 10 per cent of<br />
its average turnover for last three years. The CCI has charged<br />
penalty at 7 per cent stating that in view of the nature of violations,<br />
the penalty should be harsh. Thus, in the opinion of CCI, the case<br />
called for some type of exemplary penalty.<br />
This article analyses the order of CCI. This includes the entire<br />
background in which the order was passed, the improving track<br />
record of CCI, the signal the order sends, the questions and hopes<br />
this order raises.<br />
8<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)
2011] Index<br />
v<br />
Section C<br />
Notes on International Cases<br />
USA<br />
DuPont DE Nemours and Co. v. Colon Industries Incorporated .................................. C-09<br />
Decided on: 11 th March, 2011<br />
Anti Competitive Practice — Motion to Dismiss Claim — DuPont brought<br />
trade secrets suit against Kolon — Kolon counterclaimed that DuPont had<br />
monopolised, attempted to monopolise the para-aramid market — District<br />
Court granted motion on basis that Kolon inadequately pled the relevant<br />
geographic market within which competition for para-aramid fibers takes<br />
place — Kolon failed to plead adequately unlawful exclusionary conduct on<br />
the part of DuPont — District Court held Supreme Court precedent required<br />
including in the relevant geographic market definition all locations where<br />
product suppliers are headquartered — relied on Tampa Electric Co. v. Nashville<br />
Coal Co. — District Court erred both in holding that Tampa Electric required<br />
the Netherlands and Korea to be included in Kolon’s relevant geographic<br />
market definition — Motion to dismiss order reversed.<br />
Monopoly Claim — DuPont violated Section 2 of Sherman Act — Use of<br />
exclusive contracts with high-volume para-aramid customers — Whether<br />
District Court erred in holding that Kolon failed to adequately plead anticompetitive<br />
conduct — As Per Kolon determination rested on information<br />
inappropriately considered on a motion to dismiss and on inferences in<br />
DuPont’s favour — Kolon adequately pled all elements of monopolisation<br />
claim — Order reversed.<br />
Section D<br />
News & Events<br />
• Coles discounting of house brand milk is not predatory pricing ............................... D-31<br />
• ACCC not to oppose proposed merger of Teys bros and Cargill beef Australia ... D-31<br />
• Competition bureau seeks to block joint venture between Air Canada and United<br />
Continental ........................................................................................................................... D-32<br />
• Bell Canada to pay a penalty of $10 million for misleading advertisement ............. D-32<br />
• Les Entreprises Promécanic Ltée pleaded guilty and fined $425,000 for bid-rigging .... D-33<br />
• Polish telecoms operator fined more than •124 million for abuse of dominance ... D-33<br />
• EU General court annuls fines imposed on Mitsubishi and Toshiba for gas insulated<br />
switchgear market ............................................................................................................... D-33<br />
• Government departments appeal against the Competition Tribunal’s Decision to<br />
permit Wal-Mart .................................................................................................................. D-34<br />
• Denso bids for leniency over cartel violation in USA ................................................... D-34<br />
• FTC approves EA proposal to buy PopCap ................................................................... D-34<br />
• Stanley gets us antitrust ok to buy Niscayah ................................................................. D-35<br />
COMPETITION LAW REPORTS (JUL-AUG 2011) 9
vi<br />
Competition Law Reports [Vol. 2<br />
• Alliance agreement notified to the Competition Commission of Singapore ........... D-35<br />
• Cease & Desist Order to DeNA ......................................................................................... D-35<br />
• JFTC raids 7 auto parts makers over alleged price-fixing cartel ................................. D-36<br />
• CCI Probes Carmakers on parts, servicing .................................................................... D-36<br />
• Apple India charged of anti-competitive practices ........................................................ D-37<br />
• Regulatory reforms bill aims to settle SECTORAL clashes with the CCI .................. D-37<br />
• CCI grants interim relief to Santuka Agencies ............................................................... D-37<br />
• Competition Panel studying whether cartelisation led to rise in food prices ........... D-38<br />
• Competition Commission of India (CCI) finds M/s BigFlix Pvt. Ltd., Mumbai<br />
not contravening Section 3 or Section 4 of the Competition Act, 2002 ...................... D-38<br />
• Lafarge, Holcim say Indian units involved in antitrust probe .................................... D-38<br />
10<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)
2011]<br />
0239<br />
a<br />
b<br />
c<br />
2011 CompLR 0239 (CCI)*<br />
COMPETITION COMMISSION OF INDIA<br />
Belaire Owner’s Association<br />
v.<br />
DLF Limited and Haryana Urban Development Authority, Department of Town<br />
and Country Planning, State of Haryana<br />
CASE NO. 19 OF 2010<br />
DECIDED ON: 12.08.2011<br />
Coram<br />
Ashok Chawla, Chairman, Dr. Geeta Gouri, Anurag Goel, M.L. Tayal, and R. Prasad,<br />
(Members)<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
Definitions of “Consumer” and “Service”— Sections 2(f) and 2(u) of the Competition<br />
Act , 2002— Whether scope wider than the definition of these terms provided in<br />
Consumer Protection Act, 1986 — Real estate dealings or housing construction<br />
always taken as service whether it be MRTP Act or Consumer Protection Act or<br />
Finance Act — Competition Act applies to all the existing agreements — Covers also<br />
those entered into prior to the coming into force of Section 4 but sought to be acted<br />
upon now — Section 4 makes responsibility of the dominant player more onerous<br />
Relevant market — Meaning — Section 4 read with Sections 2(r), 19(5), 19(6)<br />
and 19(7) of the Competition Act, 2002 — Relevant market is the market for<br />
services — In instant case means services of developer/ builder in respect of<br />
high-end residential accommodation in Gurgaon<br />
Dominant Position — Abuse thereof in relevant market — Section 4 read with<br />
Section 19(4) of the Competition Act, 2002 — DLF in instant case enjoyed the<br />
position of market leader in the real estate sector in general, and in the relevant<br />
market in particular — A relevant factor under Section 19(4)(m) to hold its dominant<br />
position in the relevant market<br />
Abuse of dominant position — DLF by far the oldest and leading real estate service<br />
provider — A trend setter of various which over a period of time could be considered<br />
as “industry practices” — Industry practice cannot be a defence for anti-competitive<br />
practices/ conduct — No defence of having adopted an industry practice for practices,<br />
found to be anti-competitive and / or abusive can be claimed — DLF Ltd. was held<br />
to be in contravention of Section 4(2)(a)(i) of the Competition Act, 2002<br />
Case Précis<br />
DLF (i.e. OP-1) had announced a Group Housing Complex, named as “The Belaire”<br />
consisting of 5 multi-storied residential buildings. As per the advertisement, each of<br />
the five multi-storied buildings was to consist of 19 floors and the total number of<br />
* MANU/CO/0044/2011<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)<br />
11
0240 000240 00240<br />
Competition Law Reports<br />
[Vol. 2<br />
apartments to be built therein was to be 368 and the construction was to be completed<br />
within a period of 36 months. However, in place of 19 floors with 368 apartments,<br />
which was the basis of the apartment allottees booking their respective apartments,<br />
now 29 floors have been constructed. Consequently, not only the areas and facilities<br />
originally earmarked for the apartment allottees was substantially compressed, the<br />
project also got abnormally delayed. The fall-out of the delay was that the hundreds<br />
of apartment allottees had to bear huge financial losses, as while on one hand, their<br />
hard-earned money got blocked, on the other hand, they have to wait indefinitely for<br />
occupation of their respective apartments.<br />
The complaint alleged DLF of imposing highly arbitrary, unfair and unreasonable<br />
conditions on the apartment allottees. The Apartment Buyer’s Agreement, apart<br />
from being onerous and one-sided neither had any scope of discussion, nor variation<br />
in the terms of the agreement. The apartment allottees were not even permitted to<br />
carry out any investigation or to raise any objection to the competency of OP-1.<br />
In the in-depth investigation of various allegations made in the information, as<br />
conducted by the Director General (DG), in regard to dominance of the OP-1, the DG<br />
held that OP-1 has distinct economic advantage to it as compared to its competitors.<br />
The analysis of financials of OP-1 over different parameters clearly brought out that<br />
it is enjoying a position of market leader and it is due to its sheer size and resources,<br />
market share and economic advantage over its competitors that OP-1 is not<br />
sufficiently constrained by other players operating on the market and has got a<br />
significant position of strength by virtue of which it can operate independently of<br />
competitive forces (restraints) and can also influence consumers in its favour in the<br />
relevant market in terms of explanation to Section 4 of the Act.<br />
The following issues were framed before the Hon’ble Commission for adjudication:<br />
1. Do the provisions of Competition Act, 2002 apply to the facts and circumstances<br />
of the instant case?<br />
2. What is the relevant market, in the context of Section 4 read with Section 2(r),<br />
Section 19(5), Section 19(6) and Section 19(7) of the Competition Act, 2002?<br />
3. Is DLF Ltd. dominant in the above relevant market, in the context of Section 4<br />
read with Section 19(4) of the Competition Act?<br />
4. In case DLF Ltd. is found to be dominant, is there any abuse of its dominant<br />
position in the relevant market by the above party?<br />
In regard to Issue 1, i.e. do the provisions of Competition Act, 2002 apply to the facts and<br />
circumstances of the instant case, it was held that the definitions of “consumer” given<br />
in Section 2(f) and “service” in Section 2(u) of the Competition Act, 2002 are wider<br />
than the definition of these terms provided in the Consumer Protection Act, 1986.<br />
Thus, the dealings in real estate or housing construction has always been taken as<br />
service whether it be MRTP Act or Consumer Protection Act or Finance Act and<br />
hence, the contention raised on behalf of the DLF that sale of an apartment is not<br />
covered under the definition of service wholly misplaced and devoid of any<br />
substance. The Act applies to all the existing agreements and covers those also<br />
which though entered into prior to the coming into force of Section 4 but sought to be<br />
acted upon now. In addition to that, in the present matter, the documents filed by the<br />
informant show that indeed in some cases the agreement was entered into between<br />
DLF and the allottees after the date of commencement of Section 4 of the Act. The<br />
contention of the DLF that the impugned Clauses existing in the agreement entered<br />
between DLF and the allottees are usual conditions as per industry practice and they<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
002410241<br />
cannot be termed abuse was rejected because in terms of the Section 4 the responsibility<br />
of the dominant player has been made more onerous and if such practices are also<br />
adopted by a non-dominant player it may not fall within the ambit of Section 4.<br />
In regard to issue 2, i.e. What is the relevant market, in the context of Section 4 read with<br />
Section 2(r), Section 19(5), Section 19(6) and Section 19(7) of the Competition Act, 2002, it<br />
was held that the present matter concerns about average citizens buying a residential<br />
property out of their hard earned money or by taking housing loans. A small,<br />
5 per cent increase in the price of an apartment in Gurgaon would not make the<br />
person shift his preference to Ghaziabad, Bahadurgarh or Faridabad on the<br />
peripheries of Delhi or even to Delhi in a vast majority of cases. Accordingly, the<br />
relevant market is the market for services of developer / builder in respect of high-end<br />
residential accommodation in Gurgaon.<br />
In regard to issue 3, i.e. Is DLF Ltd. dominant in the above relevant market, in the context<br />
of Section 4 read with Section 19(4) of the Competition Act, it was held that DLF enjoys<br />
the position of market leader in the real estate sector in general, and in the relevant<br />
market in particular, and this is a relevant factor under Section 19(4)(m) for holding<br />
that it has a dominant position in the relevant market. Accordingly, DLF Ltd. was<br />
held to be holding dominant position in the relevant market in the context of Section 4<br />
read with Section 19(4) of the Act.<br />
In regard to Issue 4, i.e. in case DLF Ltd. is found to be dominant, is there any abuse of its<br />
dominant position in the relevant market by the above party, it was held that the agreements<br />
of other service providers and competitors submitted by DLF, though not identical,<br />
have certain similarities and common points. As evident from material on record<br />
that DLF is by far the oldest real estate service provider in the country, which has<br />
been operating at a big scale much before any competitor came on the scene, would<br />
automatically be a trendsetter in the sector in which it operates. All the material and<br />
evidence on record confirms that DLF has been, and continues to be, a market leader<br />
as a real estate service provider. As such, it is DLF, which would have initiated and<br />
developed the practices, which would have been followed by the later entrants, and<br />
over a period of time could be considered as “industry practices”. Therefore, even<br />
without taking into account the fact that being an industry practice cannot be a<br />
defence for anti-competitive practices/ conduct, DLF for one certainly cannot claim<br />
the defence of having adopted an industry practice for practices, which are found to<br />
be anti-competitive and / or abusive. DLF Ltd. was held to be in contravention of<br />
Section 4(2)(a)(i) of the Act.<br />
Authority referred to<br />
Palmer’s Company Law, 24 th Edition, page 332 [p. 0289, para 10.5 a]<br />
Cases referred to<br />
Bangalore Development Authority v. Syndicate Bank MANU/SC/2718/2007: (2007) 6<br />
SCC 711: AIR 2007 SC 2198: 2008 (3) BomCR 808: (2007) 3 Co MPLJ 58 (SC): II<br />
(2007) CPJ 17 (SC): 2007 (2) CTLJ 52 (SC): (2008) 1 GLR 624 (SC): JT 2007 (8) SC<br />
106: 2007 (5) KarLJ 145: (2007) 6 MLJ 975 (SC): 2007 (8) SCALE 200: [2007] 7 SCR<br />
47: 2007 (2) UJ 789 (SC) (Discussed) [p. 0282, para 8.36 g]<br />
Bharathi Knitting v. DHL Courier World Wide Express Courier MANU/SC/0628/1996:<br />
(1996) 4 SCC 704: 1996 VIII AD (SC) 312: AIR 1996 SC 2508: [1996] 87 CompCas<br />
886 (SC): JT 1996 (6) SC 254: (1996) 2 MLJ 146 (SC): 1996 (5) SCALE 142: [1996]<br />
Supp 2 SCR 653 (Discussed) [p. 0283, para 8.43 h]<br />
COMPETITION LAW REPORTS (JUL-AUG 2011) 13
0242 Competition Law Reports<br />
[Vol. 2<br />
Bhim Sen v. Delhi Development Authority MANU/MR/0012/2003 (Discussed)<br />
[p. 0296, para 12.6 f]<br />
Central Inland Water Transport Corporation Ltd. and Anr. v. Brojo Nath Ganguly and Anr.<br />
MANU/SC/0439/1986: (1986) 3 SCC 156: AIR 1986 SC 1571: (1986) 3 Co MPLJ 1<br />
(SC): 1986 LabIC 1312: (1986) II LLJ 171 SC: 1986 (1) SCALE 799: [1986] 2 SCR 278:<br />
1986 (2) SLJ 320 (SC) (Discussed) [p. 0289, para 10.8 f]<br />
Chandigarh Housing Board v. Avtar Singh and Ors. MANU/SC/0749/2010 (Mentioned)<br />
[p. 0297, para 12.12 g]<br />
Classic Motors Ltd. v. Maruti Udyog Ltd. (MANU/DE/0586/1996: 65 (1997) DLT 166<br />
(Discussed) [p. 0293, para 11.18 b]<br />
Competition Commission of India v. Steel Authority of India Limited and Anr. MANU/<br />
SC/0690/2010: 2010 CompLR 61 (Supreme Court): JT 2010 (10) SC 26: (2011) 2<br />
MLJ 271 (SC): (2010) 10 SCC 744: [2010] 103 SCL 269 (SC): [2010] 11 SCR 112: 2010<br />
(8) UJ 4093 (SC) (Discussed) [p. 0287, para 10.1 h]<br />
DLF Universal Limited v. Ekta Seth MANU/SC/7830/2008: (2008) 7 SCC 585: AIR<br />
2008 SC 3066: III (2008) CPJ 44 (SC): (2009) 2 MLJ 93 (SC): 2008 (10) SCALE 310:<br />
[2008] 86 SCL 28 (SC) (Mentioned) [p. 0282, para 8.36 g]<br />
Eastman Kodak Co. v. Image Tech. SVCS 504 U.S. 451(1992) (Discussed)<br />
[p. 0322, para 17 g]<br />
Gottrupp -Klim (1994 ECJ CELEX LEXIS 55, 1994 ECR I-5641 (Mentioned)<br />
[p. 0282, para 8.31 i]<br />
Jeffer Parish 466 US 17.1 (Discussed) [p. 0323, para 17 d]<br />
Lucknow Development Authority v. M.K. Gupta MANU/SC/0178/1994 (Relied on)<br />
[p. 0293, para 12.9 c]<br />
M/s. Unikol Bottlers Ltd. v. M/s. Dhillon Kool Drinks and Anr. MANU/DE/0008/1995:<br />
1994 28 DRJ 483 (Discussed) [p. 0292, para 11.19 h]<br />
Magus Constructions Pvt. Ltd. v. UOI MANU/GH/0115/2008: (2008) 15 VST 17<br />
(Gauhati): (2008) 217 CTR (Gau) 442: (2009) 3 GLR 514: 2008 (11) GLT 225: 2009 (3)<br />
GLT 161: [2008] 14STJ401 (Gauhati): (2009) 11Vat Reporter 46 (Mentioned)<br />
[p. 0292, para 11.15 h]<br />
PTC India Ltd. v. Central Electricity Regulatory Commission MANU/SC/0164/2010:<br />
(2010) 4 SCC 603: AIR 2010 SC 1338: 2010 3 AWC (Supp) 2709 SC: 2010 (5) BomCR<br />
762: 2010 ELR (SC) 269: JT 2010 (3) SC 1: 2010 (3) SCALE 55: [2010] 3 SCR 609:<br />
2010 (3) UJ 1203 (SC) (Discussed) [p. 028, para 10.3 d]<br />
Shri Sitaram Sugar Company Ltd. and Anr. v. Union of India and Ors. MANU/SC/<br />
0249/1990: (1990) 3 SCC 223: AIR 1990 SC 1277: (1990) 2 Co MPLJ 18 (SC): JT<br />
1990 (1) SC 462: 1990 (1) SCALE 475: [1990] 1 SCR 909 (Discussed)<br />
[p. 0288, para 10.3 c]<br />
U.S. v. E.I. du Point de Nemours & Co. 351 U.S. 377, 391(1956) (Discussed)<br />
[p. 0323, para 18 c]<br />
Wanadoo, COMP/38.223 [2005] 5 CMLR 120 (Discussed) [p. 0258, para 5.17 e]<br />
Legislations referred to<br />
Companies Act, 1956, Section 62 [p. 0287, para 10.1 g]<br />
Competition (Amendment) Act, 2009, Section 4 [p. 0256, para 5.2 c]<br />
Competition Act, 2002<br />
Section 2(f) [p. 0298, para 12.13 g]<br />
Section 2(f)(ii) [p. 0256, para 5.6 h]<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0243<br />
Section 2(h) [p. 0307, para 12.62 g]<br />
Section 2(r) [p. 0295, para 12.1 h]<br />
Section 2(s) and (t) [p. 0299, para 12.21 e]<br />
Section 2(u) [p. 0256, para 5.7 i]<br />
Section 3 [p. 0290, para 10.10 a]<br />
Section 3(1) and (2) [p. 0324, para 21 c]<br />
Section 3(3) [p. 0318, para 12.106 i]<br />
Section 4 [p. 0256, para 5.2 c]<br />
Section 4(2) [p. 0273, para 6.4 f]<br />
Section 4(2)(a) [p. 0254, para 2.2.29 h]<br />
Section 4(2)(a)(i) [p. 0319, para 13.3 d]<br />
Section 4(2)(a)(ii) [p. 0296, para 12.109 a]<br />
Section 4(g) [p. 0288, para 10.3 e]<br />
Section 18 [p. 0287, para 10.1 g]<br />
Section 19(1)(a) [p. 0248, para 2.1 d]<br />
Section 19(4) [p. 0260, para 5.27 a]<br />
Section 19(4)(a) [p. 0288, para 10.3 e]<br />
Section 19(4)(b) and (c) [p. 0260, para 5.27 a]<br />
Section 19(4)(f) [p. 0260, para 5.28 c]<br />
Section 19(4)(g) [p. 0291, para 11.10 i]<br />
Section 19(4)(h) [p. 0260, para 5.29 d]<br />
Section 19(4)(j) [p. 0260, para 5.30 f]<br />
Section 19(4)(m) [p. 0287, para 9.23 e]<br />
Section 19(4)(d) to (m) [p. 0308, para 12.70 i]<br />
Section 19(5) [p. 0296, para 12.1 h]<br />
Section 19(6) [p. 0296, para 12.1 h]<br />
Section 19(6)(b) [p. 0287, para 9.21 c]<br />
Section 19(7) [p. 0296, para 12.1 h]<br />
Section 26(1) [p. 0255, para 3.1 b]<br />
Section 27 [p. 0321, para 13 a]<br />
Section 27(a) [p. 0321, para 13.3 e]<br />
Section 27(b) [p. 0322, para 13.6 a]<br />
Section 33 [p. 0255, para 4 c]<br />
Consumer Protection Act, 1986, Section 2(o) [p. 0297, para 12.8 a]<br />
Delhi Development Act, 1957 [p. 0246, para 1.6.3 d]<br />
Finance Act, 1994, Section 65(105)(zzzzu) [p. 0000, para 5.9 e]<br />
Finance Act, 2010 [p. 0257, para 5.8 c]<br />
Haryana Apartment Ownership Act, 1982, Section 6(2) and 13<br />
[p. 0283, para 8.38 c]<br />
Haryana Apartment Ownership Act, 1983<br />
Section 6(2) [p. 0252, para 2.2.20 g]<br />
Section 9 [p. 0251, para 2.2.12 d]<br />
Section 13 [p. 0252, para 2.2.20 h]<br />
Haryana Development and Regulation of Urban Areas Act, 1975<br />
[p. 0247, para 1.6.9 h]<br />
Haryana Urban Development Authority Act, 1977 [p. 0247, para 1.6.8 a]<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)<br />
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0244 Competition Law Reports<br />
[Vol. 2<br />
Indian Registration Act, 1908 [p. 0252, para 2.2.20 h]<br />
MRTP Act, Section 2(r) [p. 0296, para 12.6 g]<br />
Punjab New (Capital) Periphery Control Act, 1952 [p. 0248, para 1.6.10 b]<br />
Punjab New Capital Periphery (Control) (Haryana Amendment) Act, 1971<br />
[p. 0247, para 1.6.9 i]<br />
Punjab Scheduled Roads and Controlled Areas (Restriction of Unregulated<br />
Development) Act, 1963 [p. 0248, para 1.6.9 h]<br />
Punjab Urban Estates Development and Regulations Act, 1964<br />
[p. 0247, para 1.6.8 b]<br />
Subsidiary Legislations referred to<br />
Competition Bill, 2002 [p. 0288, para 10.2 b]<br />
Competition Commission of India (General) Regulations, 2009<br />
Regulation 20(4) [p. 0276, para 8.1 i]<br />
Regulation 21(1) [p. 0276, para 8.1 i]<br />
Haryana Development and Regulation of Urban Areas Rules, 1976<br />
[p. 0248, para 2.1 f]<br />
Haryana Urban Development Authority (Erection of Buildings) Regulations, 1979<br />
[p. 0284, para 8.47 g]<br />
Haryana Urban Development Authority (Execution of Building) Regulation, 1979<br />
[p. 0254, para 2.2.26 b]<br />
Counsel<br />
For Appellant/Petitioner/Plaintiff: M.L. Lahoty, Adv.<br />
For Respondent(s)/Defendant: Rajan Narain and Ashok Desai, Advs.<br />
a<br />
b<br />
c<br />
d<br />
e<br />
ORDER<br />
Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel,<br />
M.L. Tayal (Members)<br />
Background<br />
1. The case under consideration concerns competition issues and consumer interests<br />
in the residential real estate market in India.<br />
1.1 With more than 1.2 billion people, India is the second most populous country in<br />
the world after China. Since 1991, a series of economic measures have led India to a<br />
higher sustained level of growth which has stimulated development across all sectors<br />
including the real estate industry. Since, the real estate industry has significant<br />
linkages with several other sectors of the economy, investment in real estate sector<br />
results in incremental additions to the GDP of the country. Along with the growth in<br />
real estate industry, accompanied by increased level of income, demand for<br />
residential units has also risen throughout India. Residential sector constitutes a<br />
major share of the real estate market; the balance comprising of commercial segment<br />
like offices, shopping malls, hotels,, etc. Apart from its importance as a segment of<br />
real estate sector, residential housing has a special place in India where investment<br />
in a home remains one of the biggest and most important investment in a person’s<br />
life. Along with food and clothing, a home is one of the most basic necessities of<br />
existence according to economic thought.<br />
f<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0245<br />
1.2 The growth in the residential real estate market in India has been largely driven<br />
by rising disposable income, a rapidly growing middle class, fiscal incentives like<br />
tax concessions, conducive and markedly low interest rates for housing loans and<br />
growing number of nuclear families. The residential sector is expected to continue<br />
to demonstrate robust growth, assisted by rising and easy availability of housing<br />
finance. The higher income levels and rising disposable income are also expected to<br />
lead to demand for the high end residential units, a situation which was not<br />
witnessed in the earlier days.<br />
1.3 Indian residential real estate sector offers plenty of opportunities. There is a<br />
huge shortage of housing units in semi-urban and urban areas and there is a scope<br />
of bridging the deficit. The growth in demand due to rising income and expenditure<br />
levels, increasing phenomenon of nuclear families and perception of investment in<br />
real estate as secure and rewarding has far outstripped the supply of residential<br />
housing. The growing rate of urbanisation, coupled with rising income has led to<br />
demand for better housing with modern amenities. Also the pace of growth of demand<br />
is far higher than the pace of growth of supply due to limited supply of urban land,<br />
lack of infrastructure in non-urban area, concentration of facilities and amenities as<br />
well as income opportunities in urban areas. This is the reason that the sector is<br />
witnessing tremendous boom in recent days. Real estate industry in India was said<br />
to be worth $12 billion in the year 2007 and is estimated to be growing at the rate of<br />
30 per cent per annum.<br />
1.4 Previously, government’s support to housing had been centralised and directed<br />
through the State Housing Boards and development authorities. In 1970, the<br />
Government of India set up the Housing and Urban Development Corporation<br />
(HUDCO) to finance housing and urban infrastructure activities and in 2002; the<br />
government permitted 100 per cent foreign direct investment (FDI) in housing through<br />
integrated township development. The residential real estate industry now is driven<br />
largely by private sector players. The mushrooming activities in the sector are reflected<br />
in the advertisements that come up in the newspapers and number of messages on<br />
the cell phones received everyday indicating launches of new products. Along with<br />
the increased activity in the sector, often reports of problems being faced by the<br />
consumers do also surface.<br />
1.5 The informant in this case has alleged unfair conditions meted out by a real estate<br />
player. It has been alleged that by abusing its dominant position, DLF Limited (OP-1)<br />
has imposed arbitrary, unfair and unreasonable conditions on the apartment-Allottees<br />
of the Housing Complex “the Belaire”, being constructed by it.<br />
Profile of Parties in the Case<br />
1.6 Before going into the details of allegations, response of different Respondents<br />
and proceedings before the office of DG and Commission, a brief profile of different<br />
parties involved in the case is discussed first.<br />
(A) The Informant<br />
1.6.1 The informant in this case is Belaire Owners’ Association. The association<br />
has been formed by the apartment Allottees of a Building Complex, “Belaire”<br />
situated in DLF City, Phase-V, Gurgaon, being constructed by OP-1. The President<br />
of the association is Sanjay Bhasin, who himself is one of the allotees in the<br />
complex.<br />
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(B) Respondents – DLF Limited<br />
1.6.2 DLF Limited (referred to hereafter, as DLF or OP-1 and includes group<br />
companies), the main Respondent is a Public Limited Company. It commenced<br />
business with the incorporation of Raisina Cold Storage and Ice Company Private<br />
Limited on 16 th March, 1946 and Delhi Land and Finance Private Limited on<br />
18 th September, 1946. Pursuant to the Order of the Delhi High Court dated<br />
26 th October, 1970, Delhi Land and Finance Private Limited and Raisina Cold Storage<br />
and Ice Company Private Limited along with another DLF Group company,<br />
DLF Housing and Construction Private Limited, merged with DLF United Private<br />
Limited with effect from 30 th September, 1970. Thereafter, DLF United Limited merged<br />
with another Company, then known as American Universal Electric (India) Limited<br />
(incorporated in the year 1963), with effect from 1 st October, 1978, under a scheme of<br />
amalgamation sanctioned by the Delhi High Court and the Punjab and Haryana<br />
High Court. The merged entity was renamed as “DLF Universal Electric Limited”<br />
with effect from 18 th June, 1980. In 1981, DLF Universal Electric Limited changed its<br />
name to DLF Universal Limited and in 2006, DLF Universal Limited changed its<br />
name to DLF Limited.<br />
1.6.3 DLF with its different group entities has developed some of the first residential<br />
colonies in Delhi such as Krishna Nagar in East Delhi that was completed as early<br />
as in 1949. Since, then, the company has developed many well known urban colonies<br />
in Delhi, including South Extension, Greater Kailash, Kailash Colony and<br />
Hauz Khas. However, following the passage of the Delhi Development Act in 1957,<br />
the State assumed control of real estate development activities in Delhi, which<br />
resulted in restrictions on private real estate colony development. As a result, DLF<br />
commenced acquiring land outside the areas controlled by the Delhi Development<br />
Authority (DDA), particularly in Gurgaon.<br />
1.6.4 In the initial years of 1980s, DLF Universal Limited obtained its first licence<br />
from the State Government of Haryana and commenced development of the “DLF<br />
City” in Gurgaon, Haryana. In the year 1985, DLF Group initiated plotted<br />
development, sold first plot in Gurgaon, Haryana and consolidated development of<br />
DLF City for township development. In 1991, construction of the DLF Group’s first<br />
office complex, “DLF Centre,” began at New Delhi and in 1993; completion of the<br />
DLF Group’s condominium project, “Silver Oaks,” at DLF City, Gurgaon, Haryana<br />
was accomplished.<br />
1.6.5 In 1996 “DLF Corporate Park,” DLF Group’s first office complex at DLF City,<br />
Gurgaon, Haryana was built and in 1999 DLF golf course was developed.<br />
The DLF Group ventured into retail development in Gurgaon, Haryana in 2002 and<br />
in the same year DLF ventured into the commencement of operation of “DT Cinemas”<br />
at Gurgaon, Haryana. DLF undertook development of “DLF Cybercity,” an integrated<br />
IT park measuring approximately 90 acres at Gurgaon, Haryana in the year 2004.<br />
In the year 2005, DLF acquired 16.62 acres (approx) of mill land in Mumbai.<br />
1.6.6 DLF in course of expansion of its business has entered into JV with Laing<br />
O’Rourke (one of Europe’s largest construction company). DLF has also entered<br />
into various MoUs, joint ventures and partnerships with other concerns like WSP<br />
Group Acquisition, Feedback Ventures, Nakheel LLC, a leading property developer<br />
in UAE, Prudential Insurance, MG Group, HSIIDC, Fraport AG Frankfurt Airport<br />
Services, etc.<br />
1.6.7 The company was listed on 5 th July, 2007 and is at present listed on NSE and BSE.<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
Haryana Urban Development Authority<br />
0247<br />
1.6.8 Haryana Urban Development Authority (HUDA) is a statutory body under<br />
Haryana Urban Development Authority Act, 1977. The precursor of HUDA was the<br />
Urban Estates Department (U.E.D.) which was established in the year 1962. It used<br />
to look after the work relating to planned development of urban areas and it<br />
functioned under the aegis of the Town and Country Planning Department. Its<br />
functioning was regulated by the Punjab Urban Estates Development and<br />
Regulations Act, 1964 and the rules made there under and the various development<br />
activities used to be carried out by different departments of the State Government<br />
such as P.W.D (B&R), Public Health, Haryana State Electricity Board, etc. In order to<br />
bring more coordination, to raise resources from various lending institutions and to<br />
effectively achieve goals of planned urban development it was felt that the<br />
Department of Urban Estates should be converted into such a body which could<br />
take up all the development activities itself and provide various facilities in the<br />
Urban Estates expeditiously. Consequently, the Haryana Urban Development<br />
Authority came into existence on 13 th January, 1977 under the Haryana Urban<br />
Development Authority Act, 1977 to take over work, responsibilities hither to being<br />
handled by individual Government departments. The functions of Haryana Urban<br />
Development Authority, inter alia, are:<br />
(a) To promote and secure development of urban areas in a systematic and planned<br />
way with the power to acquire sell and dispose of property, both movable and<br />
immovable.<br />
(b) Use this so acquired land for residential, industrial, recreational and<br />
commercial purpose.<br />
(c) To make available developed land to Haryana Housing Board and other bodies<br />
for providing houses to economically weaker Sections of the society, and<br />
(d) To undertake building works.<br />
Department of Town and Country Planning Haryana<br />
1.6.9 The Department of Town and Country Planning, Haryana is the nodal<br />
department to enable regulated urban development in the State of Haryana. The<br />
policies of the department aim at encouraging a healthy competition amongst various<br />
private developers and public sector entities for integrated planned urban<br />
development. The department also renders advisory services to various<br />
Departments/Corporations/Boards such as HUDA, Housing Board, Haryana State<br />
Industrial and Infrastructure Development Corporation (HSIIDC), Marketing Board.<br />
Major functions of the department are given as under:<br />
(i) Prevention of unauthorised and haphazard construction and regulation of<br />
planned urban development under the provision of Punjab Scheduled Roads<br />
and Controlled Areas Restriction of Unregulated Development Act, 1963 by<br />
declaring controlled areas around towns and public institutions preparation<br />
of their development plans and sectoral plans for planned urban development.<br />
(ii) To regulate the development of colonies in order to prevent ill-planned and<br />
haphazard urbanisation in or around the towns under the provision of the<br />
Haryana Development and Regulation of Urban Areas Act, 1975.<br />
(iii) Prevention of unauthorised constructions and regulation of planned urban<br />
development under the provision of the Punjab New Capital Periphery (Control)<br />
(Haryana Amendment) Act, 1971 applicable around Chandigarh in Panchkula<br />
District.<br />
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1.6.10 The Department of Town and Country Planning, Haryana is responsible to<br />
regulate the development and also to check the haphazard development in and<br />
around towns in accordance with the provisions of following statutes:<br />
(a) The Punjab Scheduled Roads and Controlled Areas Restriction of Unregulated<br />
Development Act, 1963.<br />
(b) The Haryana Development and Regulation of Urban Areas Act, 1975.<br />
(c) The Punjab New (Capital) Periphery Control Act, 1952.<br />
1.6.11 In order to involve the private sector in the process of urban development, the<br />
Department grants licences to the private colonizers for development of Residential,<br />
Commercial, Industrial and IT Park/Cyber Park Colonies in accordance with the<br />
provisions of the Haryana Development and Regulation of Urban Areas Act, 1975<br />
and rules framed thereunder.<br />
1.6.12 Directorate of Town and Country Planning Haryana headed by Director is a<br />
part of Department of Town and Country Planning.<br />
2. Information<br />
2.1 The information in the instant case was filed under Section 19(1)(a) of the<br />
Competition Act, 2002 (hereinafter, referred to as Act) by Belaire Owners’ Association<br />
against the three Respondents DLF Limited (OP-1), HUDA (OP-2) and Department<br />
of Town and Country Planning (DTCP), Haryana (OP-3). It has been alleged in the<br />
information that by abusing its dominant position, OP-1 has imposed highly<br />
arbitrary, unfair and unreasonable conditions on the apartment Allottees of the<br />
Housing Complex “the Belaire,” which has serious adverse effects and ramifications<br />
on the rights of the Allottees. It has also been alleged that OP-2 and DTCP OP-3 have<br />
approved and permitted OP-1 to act in illegal, unfair and irrational manner as they<br />
have allotted land and given licenses, permissions and clearances to OP-1 when it<br />
is ex facie clear that OP-1 has violated the provisions of various Statutes including<br />
Haryana Apartment Ownership Act, 1983, the Punjab Scheduled Roads and<br />
Controlled Areas (Restriction of Unregulated Development) Act, 1963 and Haryana<br />
Development and Regulation of Urban Areas Rules, 1976.<br />
2.2 The informant has submitted that OP-1 has used its position of strength in<br />
dictating the terms by which while on the one hand it has excluded itself from any<br />
obligations and liabilities, on the other hand it has put the apartment Allottees in<br />
extremely disadvantageous conditions. The allegations of the informant are<br />
summarised in the paragraphs below.<br />
2.2.1 OP-1 announced a Group Housing Complex, named as “The Belaire” consisting<br />
of 5 multi-storied residential buildings to be constructed on the land earmarked in<br />
Zone 8, Phase-V in DLF City, Gurgaon, Haryana. As per the advertisement of OP-1,<br />
each of the five multi-storied buildings was to consist of 19 floors and the total number<br />
of apartments to be built therein was to be 368 and the construction was to be completed<br />
within a period of 36 months. However, in place of 19 floors with 368 apartments,<br />
which was the basis of the apartment Allottees booking their respective apartments,<br />
now 29 floors have been constructed. Consequently, not only the areas and facilities<br />
originally earmarked for the apartment Allottees are substantially compressed, but<br />
also the project has also been abnormally delayed. The fall-out of the delay is that the<br />
hundreds of apartment Allottees have to bear huge financial losses, as while on one<br />
hand, their hard-earned money is blocked, on the other hand, they have to wait<br />
indefinitely for occupation of their respective apartments.<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0249<br />
2.2.2 The informant has submitted that as the Apartment Buyer’s Agreements were<br />
signed months after the booking of the apartment and by that time the Allottees<br />
having already paid substantial amount, they hardly had any option but to adhere<br />
to the dictates of OP-1. In this case, OP-1 had devised a standard form of printed<br />
“Apartment Buyer’s Agreement” for booking the apartments and a person desirous<br />
of booking the apartment was required to accept it in “toto” and give his assent to<br />
the agreement by signing on the dotted lines, even when Clauses of the agreement<br />
were onerous and one-sided.<br />
2.2.3 The informant has stated that agreement stipulates that OP-1 has the absolute<br />
right to reject and refuse to execute any Apartment Buyer’s Agreement without<br />
assigning any reason, cause or explanation to the intending Allottee. Thus, there is<br />
neither any scope of discussion, nor variation in the terms of the agreement. Page 3 of<br />
the agreement containing the Representations “B” and “C” shows that the OP-1<br />
neither on the date of announcing the Scheme<br />
“The Belaire”, nor while executing the Apartment Buyer’s Agreement had got the<br />
Layout Plan of Phase-V approved by OP-3. The decision of OP-1 to announce the<br />
Scheme, execute the agreement and carry out the construction without the<br />
approved Layout Plan has serious irreparable fall-outs for which the entire liability<br />
in normal course would have been on it, but the consequences have been shifted<br />
to the Allottees. Further, the agreement, stifles the voice of the buyers by inserting<br />
the waiver Clause in the agreement Clause that no consent of the apartment<br />
Allottee is at all required, if any change or condition is imposed by OP-3 while<br />
approving the Layout Plan.<br />
2.2.4 The informant has further submitted that the action of OP-1 in advertising the<br />
project and issuing Allotment letter without preparing and submitting the building<br />
plans/lay-out plans of the project to the Town Planner is in defiance of decision<br />
rendered in a case involving OP-1 by the National Consumer Disputes Redressal<br />
Commission, New Delhi. By inserting Representation “E”, OP-1 reserves to itself the<br />
exclusive and sole discretion not only to change the number of zones but also their<br />
earmarked uses from residential to commercial,, etc. Further, as per representation<br />
“F”, the land of 6.67 acres earmarked for the multi-storied apartments could even be<br />
reduced unilaterally by OP-1 pursuant to the approval/sanction of the Layout Plan<br />
by the OP-3.<br />
2.2.5 According to informant, OP-1 has inserted Clauses “J” and “K” to the effect<br />
that the apartment Allottee would not even be permitted to carry out any investigation<br />
and would not be entitled to raise any objection to the competency of OP-1. Vide<br />
Clause 1.1, the apartment allotee is to pay sale price for the Super Area of the<br />
apartment and for undivided proportionate share in the land underneath the building<br />
on which the apartment is located. Out of the total payment made by the apartment<br />
Allottee, OP-1 has authorised itself vide Clauses 3 and 4 that it will retain 10 per cent<br />
of the sale price as earnest money for the entire duration of the apartment on the<br />
pretext that the apartment Allottee complies with the terms of the agreement.<br />
2.2.6 The informant has stated that the agreement does not contain the proportionate<br />
liability Clause to fasten commensurate penalty/damages on OP-1 for breach in<br />
discharge of its obligations. Since, the apartments are sold without the approval of<br />
the Layout/Building Plan, Clause 1.5 stipulates that due to the change in Layout<br />
Building Plan, if any amount was to be returned to the apartment Allottee, OP-1<br />
would not refund the said amount, but would retain and adjust this amount in the<br />
last instalment payable by the apartment Allottee. Further, the apartment Allottee<br />
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would not be entitled to any interest on the said amount either. Similarly, if there is<br />
a change in the super area at the time of completion of building and issuance of<br />
occupation certificate, although the total price shall be recalculated but the amount,<br />
if any is required to be returned, the apartment Allottee would not get the refund and<br />
rather OP-1 would retain this amount, with the right to adjust this refund amount<br />
against the final instalment as well. The apartment Allottee also in the process has<br />
to forego the interest thereon.<br />
2.2.7 It has been submitted by the informant that as per Clause 1.7, against the total<br />
price paid by the apartment Allottee, he is promised the ownership right of his<br />
apartment as also prorate ownership right of land beneath the building. Apart from<br />
the said right, the apartment Allottee has paid and accordingly, has pro-rata right of<br />
common areas and facilities within the Belaire and proportionate share of club and<br />
other common facilities outside the Belaire as also the common facilities which may<br />
be located anywhere in the said complex. Although the apartment Allottee has paid<br />
for the proportionate share in the ownership of the said land, OP-1 has reserved to<br />
itself the sole discretion to modify the ratio with the purpose of complying with<br />
Haryana Apartment Ownership Act, 1983.<br />
2.2.8 According to informant, Clause 8 also indicates arbitrary and one-sided<br />
stipulations of the agreement. While time has been made essence with respect to<br />
apartment Allottee’s obligations to pay the price and perform all other obligations<br />
under the agreement, OP-1 has conveniently relieved itself by not making time as<br />
essence for completion in fulfilling its obligations, more particularly, handing over<br />
the physical possession of the apartment to the apartment Allottee. The arbitrariness<br />
and unreasonableness of the Apartment Buyer’s Agreement is also seen in Clause 10.1<br />
where under it is provided that OP-1 would complete the construction within a<br />
period of three years but the exception to this Clause have been kept wide open to<br />
keep apartment Allottee totally at the mercy of OP-1.<br />
2.2.9 The Informant has submitted that as per Clause 9.1, in future the apartment<br />
Allottee shall be at the mercy of OP-1 who has reserved to itself the right not only to<br />
alter/delete/modify building plan, floor plan, but even to the extent of increasing<br />
the number of floors and/or number of apartments. While the common areas and<br />
facilities might stand largely compressed on account of increased number of floors,<br />
the said Clause has absolutely debarred the apartment Allottees from claiming any<br />
reduction in price occasioned by reduction in the area. The only right given to the<br />
apartment Allottee vide Clause 9.2 is that it would receive a mere formal intimation.<br />
In case the apartment Allottee refuses to give consent, OP-1 has the discretion to<br />
cancel his agreement and to refund the payment made by the apartment Allottee<br />
that too with the interest @ 9 per cent per annum, which is wholly arbitrary as in<br />
case of default by the apartment Allottees, the rate of interest/penal interest is as<br />
high as 18 per cent.<br />
2.2.10 The informant has further submitted that Clause 10.1 prescribes a period of<br />
three years from the date of execution of the agreement. However, while OP-1 starts<br />
collecting the payment from the Allottees w.e.f the date of allotment, it is not at all<br />
bothered that its collection of money must be commensurate with the stage-wise<br />
completion of the project.<br />
2.2.11 The informant has also submitted that another arbitrary and unconscionable<br />
Clause 11.3 stipulates that in the event of OP-1 failing to deliver the possession, the<br />
apartment Allottee shall give notice to OP-1 for terminating the agreement. OP-1<br />
thereafter has no obligation to refund the amount to the apartment Allottee, but<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0251<br />
would have right to sell the apartment and only thereafter repay the amount. In the<br />
process, OP-1 is neither required to account for the sale proceeds nor even has any<br />
obligation to pay interest to the apartment Allottee and the apartment Allottee has to<br />
depend solely on the mercy of OP-1. The quantum of compensation has been<br />
unilaterally fixed by OP-1 at the rate of Rs. 5 per sq. ft. (or even Rs. 10 per sq. ft.) of the<br />
super area which is mere pittance.<br />
2.2.12 According to the informant, the terms of the agreement are one sided as can<br />
further be seen from Clause 11.1 in so much so that non-availability of steel, cement<br />
and other building materials has also been given the colour of force-majeure.<br />
Clause 22 is also inequitable as it not only gives exclusive discretion to OP-1 to put up<br />
additional structures upon the said building but also makes the additional structure<br />
the sole property of the OP-1 although the land beneath the building is owned by the<br />
apartment Allottee. Further, Clauses 23 and 24 make serious encroachment on rights<br />
of the apartment Allottees as although both the land beneath the building and the<br />
super areas of the building have been paid by the apartment Allottees and for all<br />
practical purposes these areas belong to the apartment Allottees, yet OP-1 unilaterally<br />
has reserved to itself the right to mortgage/create lien and thereby raise finance/loan.<br />
In an event of OP-1 DLF not able to repay or liquidate the finance/loan, the apartment<br />
Allottee may be direct sufferer, a Clause which is not reconcilable to the provisions of<br />
Section 9 of the Haryana Apartment Ownership Act, 1983 as well.<br />
2.2.13 According to informant, under Clause 32 of the agreement, OP-1 can abrogate<br />
all that has been promised to the apartment Allottee as in exercise of the power under<br />
that Clause it is permitted to unilaterally amend or change annexures to the agreement.<br />
The annexure appended to the agreement describe the apartment area, super area,<br />
common areas and facilities, club,, etc. as also the nature of equipments, fittings,<br />
which the DLF has contractually committed to provide to the Apartment Allottee.<br />
2.2.14 It has further been submitted by the informant that Clause 35 brings to the fore<br />
the arbitrary mis-match between the buyer and seller, whereby the apartment Allottee<br />
has been foist with the liability to pay exorbitant rate of interest in case the Allottee<br />
fails to pay the instalment in due time, i.e. 15 per cent for the first 90 days and<br />
18 per cent after 90 days. When this lop-sided provision is compared to Clause 11.4<br />
the unfairness of the agreement is amply demonstrated as OP-1 would pay only<br />
Rs. 5 sq. ft. to the Allottee for per month delay, i.e. 1 per cent per annum.<br />
2.2.15 According to the informant, the unfair and deceptive attitude is reflected form<br />
the Brochure issued by OP-1 for marketing “the Belaire” when compared with the<br />
Part E of Annexure-4 to the agreement. While through the Brochure a declaration is<br />
made to the general public that innumerable additional facilities, like, schools, shops<br />
and commercial spaces within the complex, club, dispensary, health centre, sports<br />
and recreational facilities,, etc. would be provided to the Allottees, however, Part “E”<br />
of the agreement stipulates that OP-1 shall have absolute discretion and right to<br />
decide on the usage, manner and method of disposal, etc.<br />
2.2.16 It has been submitted by the informant that there are various other terms and<br />
conditions of the Apartment Buyer’s Agreement which are one sided and<br />
discriminatory. The Schedule of Payment unilaterally drawn up by OP-1 was not<br />
construction specific initially and it was only after OP-1 amassed huge funds<br />
unmindful of the delay caused in the process, it made the payment plan<br />
construction-linked arising out of the compulsion of increase in the number of floors<br />
from 19 to 29.<br />
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2.2.17 According to informant, OP-1 from the very beginning has concealed some<br />
basic and fundamental information and being ignorant of these basic facts, the<br />
Allottees have entered into and executed the agreement reposing its total trust and<br />
faith on OP-1. Giving specific instances, the informant has submitted that on<br />
4 th September, 2006 one of the Allottee Mr. Sanjay Bhasin, has applied for allotment<br />
by depositing the booking amount of Rs. 20 lac pursuant whereto on 13 th September, 2006<br />
OP-1 issued Allotment Letter for Apartment No. D-161, the Belaire, DLF City, Gurgaon.<br />
On 30 th September, 2006 a Schedule of Payment for the captioned property was sent.<br />
According to the said Schedule, the buyer was obligated upon to remit 95 per cent of<br />
the dues within 27 months of booking, namely, by 4 th December, 2008. The remaining<br />
5 per cent was to be paid on receipt of Occupation Certificate. The Apartment Buyer’s<br />
Agreement, however, was executed and signed on 16 th January, 2007. By that date,<br />
OP-1 had already extracted from the Allottee an amount of Rs. 85 lac (approx.)<br />
without the buyer being aware of the sweeping terms and conditions contained in<br />
the agreement and also without having the knowledge whether the necessary<br />
statutory approvals and clearance as also mandatory sanctions were obtained by<br />
OP-1 from concerned Government authorities.<br />
2.2.18 It has been submitted that because of the initial defaults of OP-1 in not applying<br />
for and obtaining the sanction of the building plan/lay-out plan, crucial time was lost<br />
and delay of several months had taken place. This delay was very much foreseeable but<br />
OP-1 deliberately concealed this fact from the apartment Allottees. After keeping the<br />
buyers in dark for more than 13 months, OP-1 intimated the buyers on 22 nd October, 2007<br />
that there was delay in approvals and that even the construction could not take off in<br />
time. By that time, OP-1 had enriched itself by hundreds of crore of rupees by collecting<br />
its timely instalments from scores of buyers. Before a single brick was laid, the buyers<br />
had already paid instalments of November, 2006, January, 2007 March, 2007, June, 2007<br />
and September 2007, up to almost 33 per cent of the total consideration.<br />
2.2.19 According to the informant, only through the letter dated 22 nd October, 2007,<br />
the Allottees were further ex-post-facto conveyed by OP-1 in an oblique manner that<br />
the original project of 19 floors was scrapped and a new project with 29 floors with<br />
new terms has been envisaged in its place.<br />
2.2.20 The informant has submitted that the decision to increase the number of<br />
floors was without consulting the Allottees and while payment schedule was revised<br />
based upon the increase in the number of floors, there was no proportionate reduction<br />
in the price to be paid by the existing Allottees whose rates were calculated purely<br />
on the basis of 19 floors and the land beneath it although their rights/entitlements<br />
of the common areas and facilities substantially got compressed due to increase in<br />
number of floors and additional apartments, which is in violation of the provisions<br />
of the Haryana Apartment Ownership Act, 1983, more particularly, Sections 6(2)<br />
which says that the common areas and facilities expressed in the declaration shall<br />
have a permanent character and without the express consent of the apartment<br />
Owners, the common areas and facilities can never be altered and Section 13 which<br />
makes it mandatory that the floor plans of the building have to be registered under<br />
the Indian Registration Act, 1908.<br />
2.2.21 The informant has cited the case of one of the members of Belaire Owners’<br />
Association, the RKG Hospitality Private Ltd. It was submitted that concerned with<br />
delays, RKG Hospitality Private Ltd. in its communication dated 3 rd June, 2009,<br />
informed OP-1 that the project had already been delayed by 8 months and also<br />
expressed resentment that the number of storeys had unilaterally gone up from 19 to 29.<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0253<br />
In its reply dated 7 th July, 2009, with respect to the arbitrary and unilateral increase<br />
in the number of floors, OP-1 took refuge in Clause 9.1 of the Apartment Buyer’s<br />
Agreement. In its reply, without explaining the delay of 8 months, OP-1 tried to<br />
assure that it would deliver the possession within the time frame. OP-1 also stated<br />
that even if there was delay, compensation @ Rs. 5 per sq. ft. per month was already<br />
stipulated to meet the plight of the Allottees. In an admission that lay-out plans/<br />
building plans were not shown to the Allottees, OP-1 agreed that the same could be<br />
verified by any authorised representative of RKG. RKG, expressing its disapproval<br />
of the stand taken by the OP-1, sent a rejoinder on 27 th July, 2009, that Apartment<br />
Buyer’s Agreement was unfair, unreasonable and unconscionable.<br />
2.2.22 According to informant, on 25 th August, 2009, OP-1 responded stating that<br />
the buyer had signed the agreement after going through and understanding the<br />
contents thereof and as such no objection could be raised that the agreement was<br />
one-sided. On 18 th September, 2009, when the representatives of the RKG visited the<br />
office of OP-1 for the purpose of verification/inspection of the building plans they<br />
were told by an officer of OP-1 that he did not have the sanctioned building<br />
plans. However, the perusal of title deeds, licensees,, etc. revealed that various<br />
companies/entities were involved in the transaction. On 21 st September, 2009, RKG<br />
conveyed all of their concerns to OP-1.<br />
2.2.23 It has been submitted by the informant that while the discount given to the<br />
prospective buyers after the revised plan was as high as Rs. 500 per sq. ft., OP-1 had<br />
offered only Rs. 250 per sq. ft to the older buyers. The buyers of the apartments, who<br />
invested huge amount of money starting from October, 2006 in “The Belaire” and<br />
November, 2006 in “DLF Park Place” had been put to a disadvantageous position<br />
vis-à-vis prospective buyers in November, 2009, i.e. after a period of 3 years. Against<br />
all these, on 21 st December, 2009, RKG raised grievance before the Ministry of Housing<br />
and Urban Poverty Alleviation showing the helplessness of the buyers who did not<br />
have any option even to opt out as the exit route was too heavily tilted in favour of<br />
OP-1 and on 28 th January, 2010, the Association in its detailed representation to<br />
OP-1 raised many pertinent issues pointing to the illegal acts of omission and<br />
commission of OP-1. The Association categorically registered its protest by stating<br />
that the agreement was arbitrary, lopsided and unfair, with apparent double<br />
standards with respect to the rights and obligations of OP-1 vis-à-vis the investors.<br />
In its reply dated 9 th March, 2010, OP-1 did not furnish any convincing response<br />
except for referring to the one-sided Clauses of the agreement.<br />
2.2.24 The informant has submitted that the manner in which OP-1 has exercised its<br />
arbitrary authority is evidenced by the letter dated 13 th April, 2010, which it has<br />
written to Mr. Pankaj Mohindroo cancelling the allotment of his apartment for alleged<br />
non-payment of dues and unilaterally went to the extent of forfeiting an amount of<br />
over Rs. 51 lac, notwithstanding the fact that Mr. Mohindroo has adhered and<br />
fulfilled his obligation of making regular payments of all the installments totalling<br />
over Rs. 1.29 crore, while OP-1 has defaulted in all its obligations including the<br />
targeted date of completion and physical handing over the possession.<br />
2.2.25 The informant has submitted that at the time of seeking permission for public<br />
issue of its equity shares in May 2007, OP-1 gave information to SEBI with regard to<br />
Belaire as under:<br />
The Belaire is expected to be completed in fiscal 2010 and consisting of<br />
368 residential units approximately 1.3 million square feet of saleable space in<br />
five blocks of 19 to 20 floors each.<br />
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This information given to SEBI almost after six months of the allotment of the<br />
apartment to the Allottees clearly brings out the fact that either the information<br />
given to SEBI was incorrect and misleading or for reasons not known to the Allottees,<br />
OP-1 scrapped the original project in October, 2007.<br />
2.2.26 It has been submitted by the informant that the OP-2 has framed Haryana<br />
Urban Development Authority (Execution of Building) Regulation, 1979 which,<br />
inter alia, specifies various parameters for any building. The maximum FAR therein<br />
is 175 per cent of the site area and population density is 100 to 300 persons per acre<br />
@ 5 persons per dwelling unit. So far as the maximum height of the building is<br />
concerned, the Regulation prescribes that in case of more than 60 mts. height,<br />
clearances from the recognised institutions like ITTs, Punjab Engineering College<br />
(PEC), Regional Engineering College/National institute of technology, etc. and for<br />
the fire, safety clearance from institute of Fire Engineers, Nagpur will be required.<br />
There is hardly any material to show that the buildings of “The Belaire” have been<br />
constructed in adherence to the said Regulations and there has been violation on<br />
account of both FAR and density per acre.<br />
2.2.27 As per the informant, engineering norms prescribe that the foundation of a<br />
building is laid out keeping in mind a margin of 25 per cent as safety factor. This<br />
means if a building is to be constructed up to 19 floors, the foundation work would<br />
be such that the 25 per cent more load can be sustained thereon. This 25 per cent<br />
extra cushion is only a safety measure and is never utilised in making extra<br />
construction. OP-1, however, has increased the height up to 29 floors while the<br />
foundation laid out underneath the building is suited only to sustain the load of<br />
19 floors.<br />
2.2.28 It has been submitted by the informant that the fact that the project could not<br />
be completed in the stipulated time was either within the contemplation of OP-1 or<br />
it was reasonably foreseeable by OP-1 from the very threshold stage as the statutory<br />
approvals and clearances were not obtained by OP-1. The Act of OP-1 in concealing<br />
this fact, therefore, amounts to “suppresio-veri”. From the very beginning it was in<br />
the knowledge of OP-1 that the project has been inordinately delayed. Yet it never<br />
informed the apartment Allottees of the factum of delay till the time it extracted<br />
substantial payment from them. In the said circumstances, the action of collecting<br />
the money is absolutely fraudulent and unwarranted.<br />
2.2.29 According to informant, acts and deeds of OP-1 are “culpa-grave” both in<br />
attracting the buyers by making promises in the colourful brochure/advertisement<br />
to enter into the contract only to be followed by gross and deliberate carelessness in<br />
performance of the contract. The informant has contended that in the present form,<br />
the agreement is heavily weighted in favour of OP-1. Taking shelter of the expression<br />
“Sole Discretion”, OP-1 can act arbitrarily without assigning any reason for its<br />
inaction, delay in action,, etc. and yet disowned its responsibility or liability arising<br />
there from. The informant has alleged that the various Clauses of the agreement and<br />
the action of OP-1 pursuant thereto are ex facie unfair and discriminatory attracting<br />
the provisions of Section 4(2)(a) of Competition Act, 2002 and per se the acts and<br />
conduct of DLF are acts of abuse of dominant position by OP-1.<br />
2.2.30 The informant finally has also alleged that it is not clear how the various<br />
Government Agencies, more particularly, OP-2 and OP-3 have approved and<br />
permitted OP-1 to act in this illegal unfair and irrational manner. Various Government<br />
and Statutory Authorities have allotted land and given licenses, permissions and<br />
clearances to OP-1 when it is ex facie clear that OP-1 has violated the provisions of<br />
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various Statutes including Haryana Apartment Ownership Act, 1983, the Punjab<br />
Scheduled Roads and Controlled Areas (Restriction of Unregulated Development)<br />
Act, 1963 and Haryana Development and Regulation of Urban Areas Rules, 1976.<br />
3. Reference to Director General<br />
3.1 The Commission, after considering the available information formed an opinion<br />
that a prima facie case exists and directed under Section 26(1) vide order, dated<br />
20 th May, 2010 that investigation be made in the matter by the office of Director<br />
General (hereinafter referred to as DG).<br />
3.2 It would be pertinent to note that the order under Section 26(1) of the Commission<br />
was challenged before the Competition Appellate Tribunal, inter alia, raising the<br />
issues of jurisdiction. The Tribunal vide Order, dated 18 th August, 2010 observed<br />
that the Appellant (OP-1) can raise these issues before the Commission and disposed<br />
of the appeal accordingly.<br />
4. Order under Section 33 of the Act<br />
4.1 The informant also filed an application for interim Order under Section 33 of the<br />
Act on 6 th July, 2010. Additional information/submissions were also filed on<br />
19 th August, 2010, 6 th September, 2010, 9 th September, 2010 and 14 th September, 2010.<br />
In the application under Section 33, the informant prayed following to restrain<br />
OP-1 from:<br />
(i) taking any action, which prejudices the Allottees and thereby secure the<br />
substantial investments already made by the Allottees;<br />
(ii) taking any coercive actions, including cancellation of allotment, levying of<br />
penalty/interest,, etc. and from raising the demand towards the installments;<br />
(iii) diverting/utilising the funds collected from the Allottees of “the Belaire” to<br />
any other Project;<br />
(iv) creating third party rights by selling, alienating, or transferring in any manner<br />
whatsoever the apartments and common areas and facilities;<br />
(v) to direct OP-1 to create an “Escrow Account” depositing the money collected<br />
from the Allottees against 564 apartments.<br />
4.2 It had also been stated in the application under Section 33 that faced with the<br />
investigation by the Commission, OP-1 had started issuing letters to the Allottees<br />
threatening to cancel the allotment and to impose penal interest, etc.<br />
4.3 The OP-1 filed written submissions on 30 th July, 2010, 17 th August, 2010,<br />
3 rd September, 2010, 8 th September, 2010, 13 th September, 2010 in response to the<br />
application under Section 33 filed by the informant.<br />
4.4 The Commission after considering the submissions made before it passed<br />
following order under Section 33 in the instant case on 20 th September, 2010.<br />
(i) OP-1 is restrained from cancelling allotment of “apartment Allottees” of Belaire<br />
Residential Complex located in Phase-V in DLF City Gurgaon, Haryana without<br />
leave of the Commission;<br />
(ii) OP-1 is further restrained from creating third party rights by selling, alienating<br />
or transferring in any manner whatsoever the apartments and the common<br />
areas and facilities relatable to any cancellation of allotments so far, without<br />
leave of the Commission.<br />
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5. Report by Director General<br />
5.1 The DG conducted an in-depth investigation of various allegations made in the<br />
information. While conducting investigation, details from OP-1 and the informants<br />
were obtained. The DG also collected materials from different sources in order to<br />
assess various issues involved in the case. Additionally, the dynamics of real estate<br />
market alongwith State of regulations in real estate sector in India and some other<br />
jurisdictions were also examined. Various issues examined by DG are discussed in<br />
the following paras.<br />
Issue of Jurisdiction<br />
5.2 It was argued by OP-1 before DG that the basic terms and conditions agreed to<br />
between OP-1 and Allottees, were set out initially as terms and conditions of the<br />
booking application, submitted by the allottes in the year 2006 and subsequently in<br />
the Apartment Buyers” Agreement executed in the year December 2006/2007. All<br />
these terms and conditions were agreed to, prior to the coming in to force of Section 4<br />
of the Competition Act (20 th May, 2009). Thus, it cannot be suggested that any<br />
condition was “imposed” by the company after 20 th May, 2009, so as to attract<br />
Section 4 of the Act.<br />
5.3 The DG has stated that although the agreements with some of the apartment-<br />
Allottees of the Complex-Belaire referred to in the context of alleged imposition of<br />
conditions belong to period prior to 20 th May, 2009, since the effects of the agreement<br />
are given in the year 2009-10 they can be examined under the Act. In this context,<br />
DG has relied upon the Judgment of Hon’eble Mumbai High Court in case of<br />
Kingfisher Airlines Limited. The DG has also stated that alleged imposition of unfair<br />
conditions have taken place in the year 2009-10 when they were given effect to in<br />
terms of cancellation of apartment units and forfeiture of amounts by invoking the<br />
terms of agreements and thus they can be examined under the provisions of the<br />
Section 4 of the Competition Act, 2002.<br />
5.4 Further, DG has also brought out that even after 20 th May, 2009, apartment units<br />
have been sold and agreements have been executed with apartment Allottees and<br />
advertisements were still coming in the newspapers and web site of the company<br />
that apartment units were up for sale as on date of investigation and possession<br />
will be given within 12 months from September 2010, i.e. by September-October 2011.<br />
5.5 The DG has thus established that the facts of the case are squarely covered in the<br />
jurisdiction of the Competition Act, 2002.<br />
Assessment of Relevant Market<br />
5.6 OP-1 in its submissions has stated that there can be abuse within the meaning of<br />
provisions of Section 4(2)(a) of the Act only when an enterprise or group directly or<br />
indirectly imposes, unfair or discriminatory condition in purchase or sale of goods<br />
or service. It has been contended that the present agreement relates to “sale of an<br />
apartment” and not for “purchase of service”. Further, no apartment owner can be<br />
described as “Consumer” under Section 2(f)(ii) of the Act as the present agreement<br />
does not relate to hiring or availing of any service.<br />
5.7 As regards, the question of provision of services, DG in his report has stated that<br />
it would be worthwhile to discuss the definition of service within the meaning of<br />
Section 2(u) of the Act, which states as under;<br />
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0257<br />
...“service” means service of any description which is made available to potential<br />
users and includes the provision of services in connection with business of any<br />
industrial or commercial matters such as banking, communication, education,<br />
financing, insurance, chit funds, real estate, transport, storage, material treatment,<br />
processing, supply of electrical or other energy, boarding, lodging, entertainment,<br />
amusement, construction, repair, conveying of news or information and<br />
advertising.<br />
5.8 Thus, according to DG, under the provisions of the Act, the service has been<br />
defined as service of any description and it includes the provision of services in<br />
connection with business of any industrial or commercial matters such as real estate.<br />
The intent of the legislature is, therefore, to include service of any description<br />
including for real estate as clearly provided in the Section. DG has also stated that in<br />
the context of Service Tax, in the Finance Act, 2010, an Explanation has been added<br />
w.e.f. 1 st July, 2010, to the definition of “commercial or industrial construction” and<br />
“construction of residential complex,” as follows:<br />
Explanation. For the purposes of this sub-clause, construction of a complex which<br />
is intended for sale, wholly or partly, by a builder or any person authorised by the<br />
builder before, during or after construction (except in cases for which no sum is<br />
received from or on behalf of the prospective buyer by the builder or a person<br />
authorised by the builder before the grant of completion certificate by the authority<br />
competent to issue such certificate under any law for the time being in force) shall<br />
be deemed to be service provided by the builder to the buyer.<br />
5.9 As per Section 65(105)(zzzzu) of Finance Act, 1994 (inserted w.e.f. 1 st July, 2010),<br />
any service provided or to be provided, to a buyer, by a builder of a residential<br />
complex, or a commercial complex, or any other person authorised by such builder,<br />
for providing preferential location or development of such complex but does not<br />
include services covered under Sub-clauses (zzg), (zzq), (zzzh) and in relation to<br />
parking place, is a “taxable service’. Explanation.-For the purposes of this Sub-clause,<br />
“preferential location” means any location having extra advantage which attracts<br />
extra payment over and above the basic sale price.<br />
5.10 In this context, relevant portion of Notification dated 1 st July, 2010<br />
D.O.F.NO.334/03/2010-TRU Dated: 1 st July, 2010 issued by Ministry of Finance,<br />
Department of Revenue, Tax Research Unit has also been quoted by DG.<br />
5.11 Keeping in view the provisions of Section 2(u) of the Competition Act, 2002 and<br />
the legislative developments as above, DG has stated that the case is covered under<br />
the Act.<br />
5.12 As far as contention of OP-1 on the issue of consumer is concerned, DG has<br />
brought out that as per Section 2(f)(ii) the consumer has been defined as under:<br />
(f) “consumer” means any person who:<br />
(i) xxx xxx xxx<br />
(ii) hires or avails of any services for a consideration which has been paid or<br />
promised or partly paid and partly promised, or under any system of deferred<br />
payment and includes any beneficiary of such services other than the person<br />
who hires or avails of the services for consideration paid or promised, or<br />
partly paid and partly promised, or under any system of deferred payment,<br />
when such services are availed of with the approval of the first-mentioned<br />
person whether such hiring or availing of services is for any commercial<br />
purpose or for personal use.<br />
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5.13 Thus, according to DG, if any person avails of any services for a consideration<br />
which has been paid or promised or partly paid and partly promised, or under any<br />
system of deferred payment (like in this particular case), he is covered within the<br />
meaning of Section 2(f)(ii) of the Act.<br />
5.14 Further, DG has also contended that as per preamble, the Act is to ensure that<br />
the interests of the consumers are protected and there should be free and fair<br />
competition in the market.<br />
5.15 Taking into account all the above factors, DG has submitted that the instant<br />
case falls within the ambit of the Act.<br />
5.16 As regards, relevant product market for the purposes of Section 4 of the Act, DG<br />
has contended that the Industrial Classification, 2008 prepared by Central Statistical<br />
Organisation, Ministry of Statistical and Programme Implementation has classified<br />
the construction of buildings under Section F - Division 41, Group 410 and<br />
Class 4100. The activity of construction of buildings, therefore, falls under a separate<br />
head. It has also been considered that the residential units which are being considered<br />
in the instant case are not smaller low priced dwelling units. The houses in the case<br />
are of the range of around Rs. 2-3 crore (considering basic cost and additional costs<br />
over and above the basic cost). The DG has stated it is not that if the prices of<br />
apartments which value between Rs. 2-3 crore are increased by say, 10 per cent<br />
around Rs. 20 lac, the customers will settle for a house of Rs. 20 lac or even Rs. 50 lac.<br />
Therefore, construction of residential buildings, particularly of Rs. 2-3 crores would<br />
constitute a distinct class.<br />
5.17 The DG has brought out that the qualitative assessments of the characteristics<br />
of the products were analysed in case of Wanadoo, COMP/38.223 [2005] 5 CMLR<br />
120, in which the European Commission defined the relevant market as the market<br />
for high speed internet access for residential customers. The European Commission<br />
in that case examined the differences in performance between high and low speed<br />
internet access and concluded that the differences were clearly perceived by the<br />
consumers and that an analysis of price differences between them showed that<br />
consumers were prepared to pay a premium for the extra performance and<br />
convenience of high speed. Keeping in view these, the DG has stated out that the<br />
relevant product market would be services provided by the developers for providing<br />
high end apartments to the customers.<br />
5.18 As far as relevant geographic market is concerned, OP-1 has contended that its<br />
dominance needs to be looked into taking into account entire Northern India since<br />
the informant has stated that it is a leading developer in Northern India. OP-1 has<br />
also contended that in any case the geographical market should be entire NCR and<br />
not only Gurgaon.<br />
5.19 The DG has submitted that the Relevant Geographic Market in the case<br />
is the territory of Gurgaon of National Capital Territory of Delhi in which the<br />
builders/developers including OP-1 are developing and selling residential houses.<br />
It has been stated in the report of DG that a person who wants to reside in Gurgaon<br />
for various reasons like offices, work place, schools, colleges and will like to settle in<br />
Gurgaon will ask a builder to develop and build a house for himself in Gurgaon<br />
only. The buildings cannot be transported from one area/ region to another.<br />
5.20 According to DG, the geographic limit of real estate is determined with reference<br />
to its locations. The geographic market is defined in case of services towards real estate<br />
once the determination is being considered of competition or lack of it in a particular<br />
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0259<br />
area or place. There is no doubt that builders-developers not only from Gurgaon but<br />
from National Capital Territory of Delhi and all over India can provide their services<br />
to the consumers of Gurgaon for developing and constructing a house. However,<br />
that is a question of entry in the market. Thus, the relevant geographic market in this<br />
case, according to DG, has to be Gurgaon.<br />
5.21 Based upon exhaustive analysis, DG has stated that the relevant market in<br />
terms of relevant product and relevant geographic market in this case would be<br />
services provided by developers/builders for construction of high end residential<br />
buildings carried out in Gurgaon.<br />
Assessment of Dominance<br />
5.22 On the issue of dominance it has been stated by OP-1, it does not enjoy<br />
“dominant position” within the meaning of explanation (a) of Section 4. In order<br />
to find out whether it has a “Dominant Position as defined in Explanation (a) to<br />
Section 4, it is to be established that it enjoys a position of strength, in the relevant<br />
market, in India, which enables it to act in a manner as provided in Clauses (i)<br />
and (ii) thereof. Even though in a general sense, in the context of describing the<br />
status of a leading company, it may be referred to as having a “Dominant Position”,<br />
in various statements/Annual Reports, etc. such description would have no<br />
relevance, unless there is sufficient material to establish that the enterprise enjoys<br />
a “Dominant Position” in terms of the exhaustive definition thereof as set out in<br />
Explanation (a).<br />
5.23 According to OP-1, there are many large Real Estate Companies and Builders in<br />
India, particularly in Northern India as well as in NCR and Gurgaon who offer stiff<br />
competition and give competitive offers in the relevant market of residential<br />
apartments to give a wide choice to the consumers. Even though OP-1 is a large<br />
builder, there are hundreds of other builders all over India as well as in Northern<br />
India including NCR, who offer residential apartments to prospective investors.<br />
5.24 According to OP-1, the conditions of offer of each builder are considered by the<br />
intending investor and then he makes up his mind as to which offer suits him. The<br />
choice of residential property available in the market has never been limited and<br />
apart from the Residential properties offered by it there were a large number of<br />
residential properties available in the market for the investor to choose from.<br />
5.25 OP-1 has submitted analysis reports from Jones La Salle Meghraj (JLLM), ICICI<br />
Direct Analyst, RBS (The Royal Bank of Scotland) Analyst, Knight Frank, Goldman<br />
Sachs, Prop Equity, Research to support their contention that they are not dominant<br />
in the relevant market. Further, a list of 83 members of CREDAI NCR obtained from<br />
their Website also indicates the number of Developers who are their members and<br />
operate in NCR, which is indicative of the fact that there are a large number of<br />
developers, who offer competition. Based upon these, it has been stated that the<br />
residential space offered by OP-1 does not constitute any substantial part of the total<br />
residential properties offered by various developers.<br />
5.26 OP-1 has also contended that it is not a dominant player as the choice of<br />
residential property available in the market was never limited and apart from the<br />
Residential properties offered by OP-1, there were a large number of residential<br />
properties available in the market for the investor to choose from. This also included<br />
offers from Government and Public Sector Organisations like DDA, HUDA, NOIDA<br />
Development Authority, Ghaziabad Development Authority, etc.<br />
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5.27 OP-1 has also discussed in its reply factors other than the market share<br />
mentioned in Section 19(4) of the Act to state that it is not a dominant player in the<br />
relevant market. With reference to Clauses (b) and (c) of Section 19(4), it has been<br />
stated that its total size and turnover relates to commercial as well as retail business<br />
also, which is large. Moreover, it is not confined only to the aforesaid markets under<br />
consideration as relevant market. It has other businesses also. Moreover, there are<br />
several other large competitors in the relevant market. According to OP-1 so long as<br />
it has to face competition from other competitors having large size and resources, it<br />
cannot be said to enjoy a “Dominant Position” in terms of Explanation (a). It is<br />
immaterial as to who is the largest. So long as there are large players in the market,<br />
no one enterprise can enjoy a “Dominant Position” in terms of Explanation (a). Such<br />
other competitors with large size and resources also offer competing products which<br />
creates intense competition in the market and the customers have ample choice to<br />
consider before making any purchase.<br />
5.28 With reference to Clause (f) of Section 19(4), it has been brought out by OP-1 that<br />
it cannot be said that any customer is in any way dependent on it when he desires to<br />
purchase a residential property. In a case where alternative apartments are available<br />
from different sources to the consumer, to choose from, it cannot be said that the<br />
consumer is dependent on the enterprise.<br />
5.29 With reference to the factor mentioned in Clause (h) of 19(4) during the period<br />
from 2007 onwards, it has been stated by OP-1 that a large number of new developers<br />
have entered the market to offer residential apartments including luxury apartments.<br />
Such new developers are also creating intense competition in the market and the old<br />
existing developers have to meet this intense competition. In such a situation, it<br />
cannot be said that because of the “Dominant Position” of any enterprise, there is an<br />
impediment for new entrants or that the “Dominant Position” of any enterprise<br />
results in “entry barriers for new entrants.<br />
5.30 As regards, factor in Clause (j) of Section 19(4), it has been stated by OP-1 that<br />
the size of market, even for Residential Properties is very large in Northern India,<br />
NCR and even in Gurgaon. The new master plan for Gurgaon also includes within<br />
it “New Gurgaon-Manesar”. Apart from customers who buy apartments for their<br />
own residence, there are a large number of customers who buy residential apartments<br />
as an investment for value appreciation and renting in the meantime. Apartments in<br />
the residential sectors from the point of view of investment are compared on the<br />
basis of the likely value appreciation and not necessarily on account of factors<br />
which a customer may look for in a luxury apartment for his own personal use.<br />
As such, an apartment in different locations and segment may compete with each<br />
other, keeping in view the likely appreciation in value and all such apartments<br />
would fall in the same segment keeping in view the competitive aspects relating to<br />
price appreciation.<br />
5.31 DG has done exhaustive assessment of dominance with reference to explanation<br />
(a) to Section 4 of the Act. The DG in his report has assessed dominance of the OP-1<br />
along the lines indicated in Section 19(4) of the Act. The assessment of DG is<br />
summarised as under;<br />
Market share of the enterprise<br />
5.31.1 DG has submitted that as per the annual reports of OP-1, it has a number of<br />
subsidiaries on which it exercises complete control out of which DLF Home<br />
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0261<br />
Developers Limited and DLF New Gurgaon Home Developers Private Limited are<br />
prominent ones which are engaged in the business of residential real estate<br />
development. OP-1 is having 82.72 per cent ownership in M/s DLF Home Developers<br />
Limited and 100 per cent ownership in M/s DLF New Gurgaon Home Developers<br />
Private Limited as per annual report of OP-1 for the year ending 2009. Under the<br />
description -subsidiary companies /partnerships firms under control of OP-1, names<br />
of DLF Home Developers Limited and M/s DLF New Gurgaon Home Developer<br />
Private Limited are also mentioned. DG has analysed the market share of OP-1 in<br />
the relevant market by taking into account the operations of DLF Home Developers<br />
Pvt. Ltd. and DLF New Guragaon Home Developers Pvt. Ltd.<br />
5.31.2 DG has stated that as per Draft Red Herring Prospectus filed before SEBI,<br />
dated 25 th May, 2007, OP-1 in its own admission has stated that:<br />
We are the largest real estate development company in India in terms of the area<br />
of our completed residential and commercial developments. In one of the speeches<br />
given by K.P.Singh, while he was conferred the degree of doctorate in April 2008,<br />
he stated, “I am acutely aware that-my company DLF is today regarded as the<br />
largest real estate developer in the world and has a pan-India presence with over<br />
50 million square feet under construction….” The Annual Report of the Company<br />
for the year 2009, states, that “DLF’s dominant position in Indian homes segment<br />
is established due to its trusted brand with superior execution track record,<br />
pioneered townships and group housing in India, complete offering of<br />
super luxury, luxury and mid-income homes, 195 m.s.f. of plots and 21 m.s.f. of<br />
group housing developed, 290 m.s.f. of development potential, 16 m.s.f. under<br />
construction.<br />
5.31.3 DG has stated that OP-1 has pointed out certain studies and reports and has<br />
submitted reports by Jones Lang Lassalle to establish that its share in terms of<br />
number of units developed/under active stock is much less compared to other real<br />
estate player either in Gurgaon or in the entire NCR. However, since market share in<br />
terms of sales was not provided by OP-1, different sources were tapped in by DG in<br />
order to ascertain its market share and other companies engaged in real estate<br />
(residential) business. DG on the basis of report from Centre for Monitoring Indian<br />
Economy for the month of April 2010 has brought out that the market share of OP-1<br />
together with its subsidiary company-DLF Home Developers Limited is the highest<br />
in India among all the listed companies engaged in housing construction during<br />
the year 2007-08 and 2008-09. In the year 2007-08, it reached 40.46 per cent and in<br />
the year 2008-09, it was 32.65 per cent.<br />
5.31.4 DG has also brought out that in the data of CMIE, sales of DLF New Gurgaon<br />
Developers Limited to the extent of Rs. 300.24 crore for the year 2008-09 have not<br />
been considered. If that is also taken into account, the market share of OP-1 would<br />
go up further. DG has also brought out that the market share calculated on the basis<br />
of data from CMIE applies to all companies operating all over India and the data of<br />
CMIE establishes that OP-1 has the highest share (considerably higher than the<br />
nearest competitor) among all the housing construction companies in India.<br />
5.31.5 DG in his report has also brought out that the market share of the OP-1 among<br />
all companies (for housing construction) in the relevant market of Gurgaon during<br />
the period 2007-08 and 2008-09 shall be around 70 per cent and 65 per cent,<br />
respectively. DG has stated that even a margin of 5 per cent-10 per cent is given on<br />
account of other players, data and sampling error, the market share of OP-1 among<br />
the companies operating in Gurgaon exceeds 55 per cent.<br />
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5.31.6 DG has also stated that an analysis of total sales figure of 82 companies taken<br />
from CMIE, who are engaged in real estate (residential) business and are not only<br />
operating in Gurgaon but also outside Gurgaon and all over India, also establish<br />
the superior market share of OP-1 at about 44 per cent. For the year 2009-10 also, DG<br />
has shown the market share of OP-1 in relevant market to be about 50 per cent.<br />
5.31.7 DG based on details of sales, operating profit, PAT, Market capitalisation,<br />
enterprise value, of a larger sample of different real estate players taken and<br />
analysed in Outlook profit (issue dated October 2010) has also stated that OP-1 is<br />
a market leader in India in almost all respect also in quarter ending June 2010. DG<br />
has shown that the share of the second large real estate company is almost one-third<br />
of OP-1. DG has also brought out that as far as companies operating in Gurgaon<br />
are concerned on the basis of their all India sales during Quarter ending June<br />
2010, market share of OP-1 is about 45 per cent as compared to second largest<br />
company, i.e. Unitech, about 19 per cent. If sales figure only for relevant market of<br />
Gurgaon is taken (such figures are not available in public domain), the market<br />
share of OP-1 may be much more than the above figures since it is mainly<br />
concentrated in Guragon.<br />
5.31.8 DG has stated that figures from different sources have been taken since OP-1<br />
on its own did not give any figure in terms of sales as regards its market share even<br />
though specifically asked.<br />
5.31.9 As regards market share, DG has finally concluded that it is having the<br />
highest market share among all the companies operating in the relevant market over<br />
a period of three years 2007-08, 2008-09, 2009-10 and also for the quarter ending<br />
June 2010, which establishes that its position as market leader remains undisputed<br />
over last three-four years. DG has stated that it cannot be said that any other player<br />
enjoys similar or near to similar market share than that of OP-1. In their annual<br />
reports and various literature, OP-1 have stated that Unitech is one of their close<br />
competitors, however, market share of OP-1 is more than double of the market share<br />
of Unitech its nearest competitor as on date.<br />
5.31.10 DG has stated that OP-1 in their submissions have stated that the relevant<br />
market may not be limited to Gurgaon in the case. If the scope of relevant geographic<br />
market is also widened and is taken to include the areas other than Gurgaon as well<br />
and even all over India, the market share of OP-1 in relevant product market far<br />
exceeds its rivals and may not be in any case less than 32 per cent-40 per cent as per<br />
reports of CMIE and other reported figures illustrated above.<br />
5.31.11 Citing case laws from other jurisdictions like EU, DG has stated since OP-1<br />
has market share twice that of the largest competitor, i.e. Unitech, it may be considered<br />
dominant. It has also been stated by DG that in case where the market is fragmented,<br />
even market share between 25 and 40 per cent has been considered to be sufficient<br />
for establishing dominance in jurisdictions like EU. DG has brought out that the<br />
market share of the nearest competitor is much less than OP-1, and therefore, there is<br />
limited competitive constraint. In totality, it can be said that market share of OP-1 as<br />
determined is indicative of its dominance in the relevant market.<br />
5.32 DG has further submitted that market share analysis is “static” and is not<br />
suited for application to dynamically competitive markets and that market shares<br />
by themselves may not be conclusive evidence of dominance and therefore, not a<br />
proper substitute for a comprehensive examination of market conditions. Thus, along<br />
with market share, analysis of other factors mentioned in Section 19(4) has also<br />
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been carried out by him to establish dominance. The findings of DG on other factors<br />
are summarised as under.<br />
Size and resources of the enterprise<br />
5.33 DG has done analysis of about 118 companies based upon CMIE data base in<br />
real estate sectors in India to show that OP-1 together with its group concerns is<br />
having superior fixed assets and capital employed as compared to other players in<br />
the market and it has a sizable presence across several key cities (Delhi NCR, Mumbai,<br />
Bangalore, Chennai, Kolkata, Chandigarh, etc.) and clear market leadership position<br />
in commercial, retail, and lifestyle/premium apartments. Out of 118 companies<br />
analysed based upon CMIE reports, DG has found that OP-1 has about 69 per cent<br />
of gross fixed assets and 45 per cent of capital employed which shows its size and<br />
resources are far greater than other real estate concerns.<br />
5.33.1 DG has also stated that OP-1 has huge resources at their disposal. As part of<br />
their business expansion strategy, they have also diversifed into other real estate<br />
related businesses such as the development of SEZs, the development of super luxury,<br />
business and budget hotels as well as service apartments. DG has pointed out that<br />
OP-1 has more than 13,000 acres of prime land. As per draft herring prospectus filed<br />
by OP-1 Limited in the year 2007, the group had the total land bank of 10,225 acres,<br />
out of which Gurgaon has 49 per cent, which was a big concentration in one city.<br />
5.33.2 OP-1 as per its own projections are developing projects throughout India,<br />
which will involve the development of plot, residential, commercial and retail<br />
developed area of approximately 46 million square feet, 377 million square feet,<br />
88 million square feet and 56 million square feet, respectively, totalling over<br />
574 million square feet. It has taken up two big real estate projects in Mumbai recently.<br />
It has also entered into a joint venture with Hilton, a leading US-headquartered<br />
global hospitality company, to set up a chain of hotels and serviced apartments in<br />
India. It is proposing to set up 20,000 business hotel rooms in the next five years in<br />
partnership with Hilton. OP-1 had also engaged itself in the buy-out of Aman Resorts<br />
business.<br />
5.33.3 DG has also brought out that in one of the presentations, OP-1 has stated that<br />
it is India’s largest real estate company in terms of Revenues, earnings, market<br />
capitalisation and developable area with a 62-year track record of sustained growth,<br />
customer satisfaction and innovation.<br />
5.33.4 On the basis of the above details, DG has stated that OP-1 is the biggest real<br />
estate player in terms of its size and resources. The report of DG brings out that the<br />
quarter ending March 2010 has seen an increase of 202.6 per cent of income and<br />
1308.2 per cent of sales of OP-1 further boosting their position.<br />
5.33.5 DG has also pointed out following to bring out that OP-1 is far ahead than<br />
other players in the market as far as size and resources is concerned:<br />
(a) In the list of Forbes published in the year 2010, OP-1 is the only real estate<br />
company that appears in the global 2000 occupying a significant position of 923.<br />
(b) Further, its promoter KP Singh has been ranked 5 th in India’s Top 10 billionaires<br />
in the year 2008, 6 th in the year 2009 and 8 th in the year 2010, above Sunil Mittal<br />
of Airtel and Kumar Birla. There is no developer from the real estate sector who<br />
is in top 10. Mr. Singh’s net worth is estimated to be $9.2 billion against<br />
Mr. Ramesh Chandra, promoter of Unitech, the nearest competitor, whose<br />
networth has been estimated at $1.86 Billion.<br />
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(c) Further, among 100 companies ranked by Business Today in May 2009, OP-1<br />
was positioned at 14 th position during the year 2008-09 (in 2007-08 the position<br />
was 15 th ) as far as overall visibility is concerned. There was no real estate<br />
company in the list.<br />
Size and importance of the competitors<br />
5.34 DG has also established that OP-1 is having clear edge over the competitors as<br />
far as market shares, size and resources are concerned. In terms of Income and Profit<br />
after Tax, also DLF has distinct advantage over other real estate players. DG after<br />
analysing Net Income and PAT of 113 companies for 2008-09 has shown that OP-1<br />
has about 41 per cent share as far as net income is concerned and about 78 per cent<br />
as far as PAT is concerned.<br />
5.34.1 After taking into account, figures of market capitalisation of Top 100 companies,<br />
taken as on 17 th September, 2010 from rediff.com of Top 100 companies in India, DG<br />
has shown that while OP-1 with market capitalisation of 59,782.43 crore holds<br />
23 rd position, Unitech holds 68 th position with market capitalisation of 22,106.70 crore,<br />
way behind OP-1. There is no other real sector company that appears in the list.<br />
In April 2009 also, OP-1 stood at 24 th rank in terms of market capitalisation. At that<br />
point of time Unitech Limited was positioned at 92 nd position. DG has also brought<br />
out following to establish that OP-1 is far ahead than the competitors in size and<br />
resources;<br />
(a) OP-1 is the only company in India in the real estate sector to have been awarded<br />
“Superbrand” ranking.<br />
(b) If position of OP-1 is compared with that of Unitech, its nearest competitor, it<br />
has been found by DG that OP-1 emerges as clear front runner in terms of sales,<br />
Net Income, PAT, Gross Fixed Assets and Capital Employed.<br />
(c) Similarly, OP-1 also emerges leader when financial position of other big players<br />
like Emmar, Parshvnath and Omaxe group are compared.<br />
Economic power of the enterprise including commercial advantages over<br />
competitors<br />
5.34.2 DG has established that OP-1 has gigantic asset base as compared to its<br />
competitors. Further, it also has enormous cash profits and Net profit as compared<br />
to its competitors. The position of Cash profits and Networth (figures taken from<br />
CMIE) shows that OP-1 is far ahead on these accounts also as compared to its<br />
competitors. Based on a comparison of cash profits and net profit of 128 companies,<br />
it has been established by DG that OP-1 has 78 per cent and 63 per cent share,<br />
respectively. Huge cash profits and networth of OP-1 is giving them tremendous<br />
economic power over their rivals.<br />
5.34.3 DG has stated that OP-1 is active in the market since 1946 and has also the<br />
distinction of developing 3,000 acre integrated township in Gurgaon. In 2009, it<br />
bagged a 350-acre plot for Rs. 1,750 crore in Haryana for developing a recreation<br />
and leisure project. It has vast Land bank and familiarity with the area which gives<br />
it distinct advantage. The Annual Reports of OP-1 for the year 2009 also states that,<br />
it is a having a dominant position in Indian offices segment too, “due to the fact that<br />
it is founder and pioneer of Grade A office leasing market, it has locational advantages<br />
and deep customer relationships having occupancy levels of 98 per cent, more than<br />
two-third of client base belonging to Fortune 500 list.......”.<br />
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0265<br />
5.34.4 It has been pointed out by DG that going by size of OP-1 and its scale of<br />
operations, Unitech may be the only comparable player. However, not only Unitech<br />
lags behind sales, assets, market capitalisation, income, profit and overall market<br />
share but in other aspects also. Further, it has higher visibility in metro cities, than<br />
Unitech. The presence of OP-1 in prime locations in New Delhi and Mumbai<br />
(NTC mill land) also suggests the high quality of its land bank.<br />
(iv) Based upon analysis- reports of Motilal Oswal, it has been stated by DG that<br />
OP-1 has a presence in 32 cities in India. Further, OP-1 has the richest quality<br />
landbank, with almost 45 per cent of landbank in Tier I cities and it has a clear<br />
market leadership position in commercial, retail, and lifestyle/premium<br />
apartments.<br />
5.34.5 It has also been pointed out by DG that OP-1 has significant gross asset value<br />
as per reports of Molitlal Oswal in Gurgaon in 2007 and has advantage over other<br />
players as far as land cost outstanding as per cent of market capitalisation, Land<br />
cost outstanding as per cent of net profit is concerned.<br />
5.34.6 It has further been pointed out by DG that in terms of execution, OP-1 is better<br />
positioned, due to vast experience in the industry, larger area developed till date and<br />
joint ventures with strategic partners. The JV with Laing O’Rourke (one of Europe’s<br />
largest construction company) provides access to one of the best technology, processes<br />
and engineering skills. OP-1 has also undertaken joint ventures and partnerships<br />
with WSP Group to provide engineering and design consultancy and project<br />
management services for real estate plans of DLF, Acquisition of stake in Feedback<br />
Ventures to provide consulting, engineering, project management and development<br />
services for infrastructure projects in India, MoU with Nakheel to develop real estate<br />
projects in India through a 50:50 JV company, Joint venture with Prudential Insurance<br />
to undertake life insurance business in India, Joint venture with MG Group to enter<br />
into a 50:50 joint venture with MG group for real estate development, joint venture<br />
with HSIIDC for developing two SEZ projects, Memorandum of Co-operation with<br />
Fraport AG Frankfurt Airport Services to establish DLF Fraport SPV which would<br />
focus on development and management of certain airport projects in India.<br />
5.34.6 DG has concluded that all these above establish that OP-1 has distinct economic<br />
advantage to it as compared to its competitors. The analysis of financials of OP-1 over<br />
different parameters clearly bring out that it is enjoying a position of market leader.<br />
Vertical integration of the enterprises or sale or service network of such enterprise<br />
5.35 It has been stated by DG that OP-1 has developed 22 urban colonies, and its<br />
development projects span over 32 cities. It has about 300 subsidiaries engaged in<br />
real estate business. Thus, it has a vast network through which it can do business<br />
effectively. According to DG, since OP-1 has large land bank, it is capable of carry<br />
out construction without depending upon the requirement of acquiring land.<br />
Moreover, the land was also acquired long back, unlike its competitors; the land<br />
was acquired by it quite a low cost. Its wide sales network act as a relevant factor<br />
conferring upon commercial advantage over its rivals.<br />
Dependence of consumers on the enterprise<br />
5.36 DG has submitted that although there are other real estate developers also in<br />
Gurgaon, since OP-1 has acquired land quite early and has developed integrated<br />
township in Gurgaon, there is an advantage and if consumers want to have all the<br />
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developed facilities within the DLF Township, they will have to opt for residential<br />
units developed and constructed in Gurgaon. Further, there is superlative brand<br />
power of OP-1 which affects consumers in its favour.<br />
Entry barriers including barriers such as regulatory barriers, financial risk, high<br />
capital cost of entry, marketing entry barriers, technical entry barriers,<br />
economies of scale, high cost of substitutable goods or service for consumers<br />
5.37 DG has pointed out that entry barriers exist in the sector in the form of high cost<br />
of land, established brand value of DLF and the fact that DLF has been in this<br />
business since 1946 unlike other players who have commenced business in Gurgaon<br />
recently. DG has also stated that DLF has developed economies of scale as in their<br />
own admissions in their prospectus filed before SEBI, they have stated:<br />
Our size allows us to benefit from economies of scale. We are able to purchase<br />
large plots of land from multiple sellers, thus enabling us to aggregate land at<br />
lower prices. We believe that we enjoy greater credibility with sellers of land as<br />
well as buyers of our properties as a result of our reputation and our scale of<br />
operations. We are able to undertake large scale projects in multiple phases,<br />
which provides us with the opportunity to monitor market acceptance and modify<br />
our projects in accordance with customer needs. We are able to integrate our<br />
residential, commercial and retail capabilities, allowing us to achieve greater<br />
value for our projects, as demonstrated by DLF City. The large scale of our<br />
developments within a business line creates demand for our other business lines.<br />
Additionally, we are able to use our bulk purchasing capabilities for the<br />
acquisition of raw materials such as cement and steel, the use of better construction<br />
technology such as pre-casting, as well as high cost equipment such as shuttering<br />
machines and tower cranes. Further, the extent and quality of our assets enable<br />
us to finance the active acquisition of land, adjust the scale of our projects and<br />
provide us with the flexibility of retaining rather than selling our developments<br />
in the event of an economic downturn. We were one of the first developers to<br />
anticipate the need for townships on the outskirts of fast growing cities and are<br />
generally credited with the growth of Gurgaon. We were one of the early<br />
developers to focus on theme-based projects such as The Magnolias development<br />
in DLF City, which includes a golf course. We are one of the few developers in<br />
India to provide commercial space with floor plates of over 1,00,000 square feet.<br />
We were an early developer of large shopping malls with integrated entertainment<br />
facilities. We continually offer our customers new designs and concepts. For<br />
example, in some of our super luxury developments, we allow purchasers to<br />
customize the layout of their new homes. Our developments typically integrate<br />
construction and safety standards which exceed nationally prescribed minimum<br />
levels and we provide management services for properties in all our business lines.<br />
5.37.1 According to DG, the above shows that OP-1 is having economies of scale<br />
which cannot be matched by its competitors. The sheer size of operations gives OP-1<br />
the advantage of economies of scale, right from raw material sourcing to higher<br />
utilisation of assets. This is evidenced by its ratio of Profit Before Depreciation,<br />
Interest and Taxes (PBDIT) over Income of about 76 per cent and Profit After Tax<br />
(PAT) over income of 25 per cent. OP-1 has the highest ratio of Profit Before Interest<br />
and Taxes (PBIT) over income among the top real estate developers of India, far<br />
ahead of Unitech its nearest rival. DG quoting from the judgments from EU has<br />
stated that particular barriers to competitors entering the market are..... economies of<br />
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scale from which newcomers to the market cannot derive any immediate benefit.<br />
OP-1 is also having the benefit of prior entry and access to bigger capital which<br />
makes its position quite formidable. Further, OP-1 has an experienced, highly<br />
qualified and dedicated management team, many of whom have over 20 years of<br />
experience in their respective fields. Because of their established brand name and<br />
reputation for project execution, they have been able to recruit high caliber<br />
management and employees.<br />
Countervailing buying power<br />
5.38 DG has further stated that there is a huge housing shortage and buyers cannot<br />
influence the business decisions of OP-1 since the residential units are in shortage.<br />
The consumers are dependent on OP-1 in Guragon because of its huge land reserves<br />
and projects under construction. The demand is huge while the supply is less. Thus,<br />
there is no case of countervailing buyer power in this case which has any sobering<br />
impact upon the dominance and market power of OP-1.<br />
Social obligations and Social costs<br />
5.39 DG has submitted that in case of developing buildings by private developers,<br />
the motive is profit making moreso in the case of high end builders like OP-1 which<br />
is providing housing for richer segment of the society. Thus, there is no social<br />
obligation and social costs cast upon OP-1 which will justify its conduct of abuse, if<br />
any, arising out of its position of being market leader.<br />
Relative advantage, by way of the contribution to the economic development, by<br />
the enterprise enjoying a dominant position having or likely to have an<br />
appreciable adverse effect on competition<br />
5.40 Finally, DG has also brought out that the advantageous position of OP-1 in<br />
terms of commercial advantage may be traced back to its operations which go back<br />
to the year 1946. Founded in 1946, OP-1 has developed some of the first residential<br />
colonies in Delhi such as Krishna Nagar in East Delhi that was completed as early<br />
as in 1949. Since, inception, the company has developed about 224 m sq ft, including<br />
22 urban colonies as well as an integrated 3,000 acre township in Gurgaon by the<br />
name of DLF City. This gives the company an edge over its competitors. DLF Group<br />
over the years, as above, has acquired the status of India’s largest real estate company<br />
in terms of Revenues, earnings, market capitalisation and developable area. The web<br />
site of OP-1 also displays the fact that it is the largest real estate player. It is significant<br />
that the promoters of OP-1-KP Singh and his family stood at the 9 th position in an<br />
analysis done by Business World (Super Rich 2010 of India) behind just only Tatas,<br />
Ambanis, Aziz Premji, Sterlite group, Sunil Mittal group, Jindals and Adanis. The<br />
worth of promoters was Rs. 41,232.07 crore as on March 2010.<br />
5.41 Based upon above analysis of factors mentioned in Section 19(4) of the Act, DG<br />
has stated that OP-1 is not only enjoying the highest market share, but also is enjoying<br />
clear advantage over other players as far as size and resources and economic power<br />
is concerned. Its economies of scale, resources, and the fact of it being in business<br />
since last 60 years in the relevant market is also giving it a distinct advantage over<br />
the other players in the market.<br />
5.42 DG has brought out that dominance in law implies that a firm because of its<br />
position of economic strength has a high degree of immunity from the normal<br />
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disciplining forces of rivals’ competitive reactions and consumer behaviour. DG<br />
has brought out that in Hoffmann-La Roche:<br />
the Court of justice while defining a position of economic strength, stated, that<br />
the position of strength or presence of dominance does not preclude any<br />
competition but enables the undertaking...if not to determine, at least to have an<br />
appreciable influence on the conditions under which that competition will<br />
develop, and in any case to act largely in disregard of it so long as such conduct<br />
does not operate to its detriment. Thus, the argument of OP-1 that there is large<br />
number of players in the market and therefore, OP-1 cannot enjoy a position of<br />
dominance does not hold good.<br />
5.43 Since, OP-1 has developed integrated townships in Gurgaon over huge piece of<br />
land acquired on early occasion, if the consumers want to have residential units in<br />
Gurgaon or in the township developed by OP-1, they have to largely be dependent<br />
upon it, moreso when because of its superior size, resources, market share, it has<br />
built a brand over the years, which affects the consumers in its favour. OP-1 stands<br />
at a Position No. 47 in a survey of 100 most valuable Brands of India conducted by<br />
Indian Council of Market Research and 4Ps (Business and Marketing). There is no<br />
other real estate player in the list of Top 100 Brands. The value of Brand of OP-1<br />
makes it capable of affecting the competitors in its favour and due to that OP-1<br />
stands uniquely positioned to operate independently without having disciplining<br />
forces of rivals’ competitive reactions. Due to its position of strength, it can operate<br />
independently of the other players in the relevant market. The consumers would<br />
also be affected in its favour because of sheer size, sheer resources, its economies of<br />
scale, its brand value, which is far superior to any other existing real estate developer<br />
as on date and also due to its superior economic power over its competitors.<br />
5.44 Summing up his findings on the question of dominance, DG has concluded<br />
that it is due to its sheer size and resources, market share and economic advantage<br />
over its competitors that OP-1 is not sufficiently constrained by other players operating<br />
on the market and has got a significant position of strength by virtue of which it can<br />
operate independently of competitive forces (restraints) and can also influence<br />
consumers in its favour in the relevant market in terms of explanation to Section 4 of<br />
the Act. Based upon all the above factors, DG has concluded that it may be said that<br />
OP-1 is enjoying a position of dominance in terms of Section 4 of the Act.<br />
6. Abuse of Dominance<br />
6.1 The DG has examined the alleged abusive behavior of OP-1 by taking into account<br />
various allegations mentioned in the information and four representative cases of<br />
apartment Allottees of the association apart from the cases mentioned in the<br />
information.<br />
6.2 DG after examining the allegations in the information has concluded the<br />
following:<br />
(A) Commencement of project without Sanction/Approval of the projects<br />
(i) DG has stated that it is a fact that OP-1 announced a Group Housing<br />
Complex, named as “The Belaire” to be constructed on the land earmarked<br />
in Zone 8, Phase-V in DLF City, Gurgaon, Haryana. Certain customers<br />
booked an apartment unit in Belaire by paying initial amount of<br />
Rs. 20,00,000 in August-November 2006. However, application for<br />
approval of building plans was submitted only in December 2006 by<br />
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2011]<br />
Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0269<br />
OP-1. Against the application dated 20 th December, 2006 and subsequent<br />
letter dated 3 rd April, 2007 of OP-1, Director, Town and Country Planning,<br />
Government of Haryana accorded approval for the project only in<br />
April 2007 vide letter dated 18 th April, 2007.<br />
(ii) Permission was granted for the construction of the project - subject to the<br />
provisions of Punjab Scheduled Roads and Controlled Areas Restriction<br />
of Unregulated Development Act, 1963 with certain other stipulations.<br />
From the details of approvals and building plans dated 30 th November, 2006,<br />
it is noted that while in each of the Blocks A to C, total number of floors were<br />
to be 19, in Blocks D to E, the number of floors were to be 18 each. Total<br />
number of apartments to be built therein was to be 368. The Allotment<br />
letters were issued in the year 2006 and apartment buyers’ agreements<br />
were signed even before the approval for the plan was accorded by<br />
Town Planner.<br />
(iii) The Apartment Buyer’s agreements were signed much after the allotment<br />
letter and before that amounts were collected from the Allottees. In the<br />
application for allotment which was made in the year 2006 in the above<br />
cases also it was mentioned that, “I/we are making this application<br />
with the full knowledge that the building plan for the building in which<br />
the apartment applied for is located are not yet sanctioned by the<br />
Competent Authority.”<br />
Thus, the apartment buyers agreement also bring out that even hen the<br />
agreements were executed the approvals were not in place. Page 3 of the<br />
Representations “B” and “C” shows that OP-1 neither on the date of<br />
announcing the Scheme “The Belaire”, nor while executing the Apartment<br />
Buyer’s Agreement had approved Layout Plan of Phase-V by the Director,<br />
Town & Country Planning, Haryana, Chandigarh.<br />
(iv) Clearance from Airport Authority of India for the original project was<br />
also given only on 31 st January, 2007 for the project.<br />
(v) Based upon above, DG has concluded that there is no dispute on this<br />
score that the applications for allotment were invited, agreements were<br />
signed and considerable amount of consideration was collected even<br />
when the plans were not approved by the Competent Authority and<br />
clearances were not obtained from other authorities. In October 2007,<br />
OP-1 intimated to the Allottees that there was delay in approvals and<br />
that even the construction could not take off in time. By that time, the<br />
buyers had already paid almost one-third of the total consideration. DG<br />
has concluded that facts on record also reveal that a revised plan was<br />
submitted vide letter dated 30 th December, 2008 enhancing the number of<br />
floors from 19 to 29 and number of apartments from 368 to 544. The revised<br />
plan for 29 th floor was approved only on 6 th August, 2009.<br />
(vi) Thus, DG has established that before the approval was obtained, DLF<br />
had already commenced the structural work for all 29 th floors. According<br />
to DG, it is a moot question when the Competent Authority had clearly in<br />
sanction letter dated 18 th April, 2007 stipulated that any further<br />
construction without approval or deviation would not be permissible<br />
and that sanction will be void ab-initio, if any of the condition mentioned<br />
in the sanction letter were not complied with, how OP-1 proceeded with<br />
the construction of 29 th floor. Further, it is also noted that OP-1 had started<br />
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construction activities as early in December 2006 and they also<br />
intimated the Allottees about the same as is clear from the letter dated<br />
26 th December, 2006 issued to Amit Jain, one of the Allottees. However,<br />
the approval even for 19 floors (initial approval) was accorded only on<br />
18 th of April 2007.<br />
(B) Increase in number of floors mid-way<br />
(i) DG has brought out that it is not disputed that the originally the project<br />
was conceived with 19 floors. This is clear from the red herring prosecutes<br />
of May 2007, filed with the SEBI which states:<br />
The Belaire is expected to be completed in fiscal 2010 and consisting of<br />
364 residential units with approximately 1.3 million square feet of saleable<br />
space in five blocks of 19 to 20 floors each.<br />
It was revised mid-way and the consumers were not told about this till<br />
October-December 2007 and when this issue was raised, only a hint of<br />
possible increase in floors was given as is clear from the correspondence<br />
with Akhil Sambhar, one of the Allottees. It could be because the approval<br />
from Airport authority was obtained on 21 st January, 2009 and revised<br />
plan for 29 th floor was approved only on 6 th August, 2009 by the Competent<br />
Authority.<br />
(ii) According to DG, the consumers who had applied in the year 2006<br />
thinking that the project is of 19 floors were told in October 2007 that the<br />
project was being revised, even when the application for approval was<br />
moved in December 2008 and the approval for the revised plan was<br />
given in August 2009.<br />
(C) Issue of Floor Area Ratio and Density Per Acre<br />
(i) DG has also submitted that while booking the apartment units, the<br />
Allottees were not told about the fact that there will be revision in the<br />
number of floors from 19 to 29. This has the effect of increasing the FAR<br />
and density of population occupying the apartments. While the number<br />
of floors has increased, the area remains the same. It is not that new<br />
floors are being constructed on additional space. In fact the number of<br />
floors has gone up from 19 to 29 utilising the same area space. The<br />
increase in floors certainly acts against the interest of the Applicants-<br />
Allottees since the Allottees will now have to contend with additional<br />
floors than what they might have thought while making applications for<br />
allotment. According to DG, once there has been change in density per<br />
acre and FAR, the buildings complex is bound to suffer from some other<br />
infirmities in terms of structural strength, other amenities, facilities<br />
including common area than conceived originally.<br />
(D) Time Schedule for completion and possession<br />
(i) According to DG, it is an admitted position of OP-1 that there has been<br />
delay in construction. As per apartment Buyers agreement, the construction<br />
was contemplated to be completed within three years of the agreement.<br />
The word “contemplation” leaves wide scope for the deliveries. However,<br />
from the letter dated 22 nd October, 2007 to the Allottees it had been confirmed<br />
that the deliveries will be affected within the stipulated time. The letter<br />
gives impression that the brickwork would be completed by 15 th of May 2009<br />
and the rest of the work would be completed very soon thereafter. In letter<br />
dated 19 th February, 2007 to Mr. Pankaj Mohindroo, one of the Allottees it<br />
a<br />
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c<br />
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2011]<br />
Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0271<br />
was mentioned that the project was to be completed within 3 years of the<br />
date of agreement. A letter written to RKG Hospitalities Limited, one of the<br />
allotees, on 7 th July, 2009 by OP-1 states that the date of delivery has been<br />
indicated as March 2010. However, on 24 th November, 2009 OP-1 wrote a<br />
letter to Mr. Sanjay Bhasin, President of the informant association<br />
intimating that the final possession will be given in first quarter of 2011<br />
Further, in September 2010 advertisement have come in newspapers<br />
stated that possession would be given in 12 months and one can still book<br />
an apartment in the scheme. Thus, expected possession is by<br />
September-October 2011 now. This shows that the project have been delayed<br />
badly. According to DG, the whole sequence of events gives an impression<br />
of misrepresentation.<br />
(E) Forfeiture of Amounts<br />
(i) DG has noted that the Allottees of the Belaire project raised several issues<br />
with OP-1 and there were exchange of letters and finally during the year<br />
2009-2010, allotments in case of certain Allotees stand cancelled after<br />
forfeiting amounts on account of Earnest Money, Brokerage charges and<br />
delayed payments. The project was conceived for 19 floors and now a<br />
project of 29 floor is put in place. When the Allottees raised issues seeking<br />
clarifications, OP-1 kept on reminding them of the Clauses of the<br />
agreement, asking them to pay the installments and finally cancelled the<br />
allotment of the apartments. At the time of cancellation, huge amounts<br />
which were paid by the Allottees all through have been forfeited as has<br />
been brought out above. In turn, OP-1 has gained; once by forfeiting<br />
keeping the amount of earnest money, by charging interest on delayed<br />
payments and brokerage, etc. For example, in case of Mr. Amit Jain, an<br />
amount of about Rs. 50 lac has been forfeited out of his total payment of<br />
Rs. 95 lac. Thus, while Allottees have lost money and paid for interest<br />
and brokerage, OP-1 has gained.<br />
6.3 DG has also stated that OP-1 has taken shelter of the agreements executed with<br />
the allotees, terms and conditions of which are loaded heavily in favour of OP-1 and<br />
by virtue of which it has been able to impose unfair conditions by abusing its<br />
dominant position. These agreements, according to DG, are unfair on many counts<br />
as under:<br />
(i) After analysing Representation J and Representation K of the agreement,<br />
DG has submitted that through the above Clauses the right of the<br />
apartment Allottee to carry out any investigation regarding legality of<br />
land, construction, etc. has been taken away. The Allottee is not even<br />
entitled to raise any objection to the competency of OP-1 and documents<br />
relating to its title and the representation.<br />
(ii) The representation E of the agreement gives entire discretion to OP-1 to<br />
change the zoning plans, usage patterns, etc. Thus, the Allottees will not<br />
come to know about the plans till OP-1 chooses to inform the Allottees<br />
about the same.<br />
(iii) Representation F gives OP-1 rights to reduce the land unilaterally<br />
pursuant to the approval/sanction of the Layout Plan.<br />
(iv) Based on analysis of Clause 1.1, 1.5, 1.6, 1.7 of the agreement, DG has<br />
concluded that the consumers are not made known the final carpet area,<br />
built-up area and super area of the apartment units and final price which<br />
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he is expected to pay which gives rise to complete information asymmetry.<br />
As regards, payment of Preferential Location Charges, the Allottees are<br />
completely dependent upon OP-1. In case, there is change in location,<br />
the PLC would be refunded/adjusted but only at the time of last<br />
installment. No interest is payable by OP-1 on such refund of PLC even<br />
when the money will be utilised by the company. These Clauses also give<br />
OP-1 sole discretion to alter the structure.<br />
(v) Clause 3 and Clause 4 of the agreement have given enough discretion to<br />
OP-1 to retain earnest money in case a person wants to come out of the<br />
agreement. Thus, the agreement provides for a costly exit option.<br />
(vi) DG has noted from Clause 9.1 of the agreement that even the payment<br />
plans, alterations, are subject to change at the sole option and discretion<br />
of OP-1 and apartment Allottee would have no say on this. Under<br />
Clause 9.2, no right has been given to the Applicants-Allottees to raise<br />
any objection towards alterations/modifications.<br />
(vii) DG has concluded that there is no firm commitment for handing over<br />
possession of apartment since the Clause 10.1 only mentions that OP-1<br />
contemplates to complete construction of the said Building/said<br />
apartment within a period of three years from the date of execution of<br />
this agreement. This has given OP-1 ample scope to modify the time<br />
schedule in accordance with its own discretion and this is the reason<br />
that the project has got delayed considerably.<br />
(viii) DG has noted that through Clause 11.3 the consumer has been deprived<br />
the right of claiming any refund of his amount. Rather OP-1 reserves all<br />
the rights and only after the property is sold that the allotees are expected<br />
to get their money back. This makes the agreement completely in favour<br />
of OP-1. Further, under Clause 20 of the agreement, OP-1 is free to make<br />
any alterations in buildings even when the apartment Allottees might<br />
object and under Clause 22 of the agreement, absolute right has been to<br />
OP-1 to make any addition or alteration not making clear as to what<br />
extent such addition or alteration can be made. A person seeking an<br />
allotment, therefore, is not aware as to what kind of structure finally is<br />
going to be there in place finally at the site.<br />
(ix) Clause 23 and 24 provides for right of OP-1 to raise finance and agreement<br />
subordinate to mortgage by it. These Clauses are unfair to the extent that<br />
even if the entire payment is made by the consumers they are subject to<br />
mortgages at the will of the company for the finances raised by it for its<br />
own purpose. Further, under Clause 32 of the agreement OP-1 has<br />
reserved for itself all the right to correct, modify, amend or change all the<br />
annexure attached to the agreement at its sole discretion.<br />
(x) DG has submitted that along with favourable Clause in respect of delivery,<br />
OP-1 has covered delay on account of conditions like inability to procure<br />
labour, equipment, facilities, materials or supplies also under the force<br />
majeure Clause under Clause 11.3 so that the delays in deliveries may be<br />
adequately covered taking these pleas.<br />
(xi) DG has stated that while agreement was executed, there was an<br />
apprehension that there could be delay (or even abandonment of the<br />
project) on account of some adverse order by the Government (since there<br />
was no approval for construction of higher floor although was already<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0273<br />
under consideration of the company), and therefore, OP-1 has covered<br />
itself adequately through Clause 11.2 of the agreement which shifts all<br />
the liability on the consumer as if it was their fault if the approval from<br />
the Government are not received. DG has stated that if this Clause is read<br />
with the other Clauses of the agreement, it gives an impression that fully<br />
aware of the fact that there was no approval from the Competent<br />
Authority, the scheme was launched, the money was collected toward<br />
services of developing and selling an apartment unit and in eventuality<br />
of not getting approval shifting the entire burden on to the consumer to<br />
the extent of utilising their money for fighting cases in the Court.<br />
(xii) According to DG, in case there is a delay, the agreement is again heavily<br />
loaded in favour of OP-1. While as per Clause 11.4 the liability is limited<br />
to payment of compensation @ Rs. 5 per sq.ft. of the super area per month<br />
for the period of delay beyond three years; the apartment Allottee have<br />
been subjected to payment of interest @ 15 per cent per annum for the<br />
first 90 days and additional penal interest @ 3 per cent per annum for a<br />
period exceeding 90 days as per Clause 35 of the agreement. The interest<br />
chargeable to the Allottees in case of delay in making payments is much<br />
more than delay on account of construction and handing over the<br />
possession to the Allottees. Since, OP-1 has covered itself on many<br />
accounts to save itself from liability in case of delay on delivery, there are<br />
possibilities of not paying anything to the consumer, while in case of<br />
delay in making payment by the consumer there is no escape from making<br />
payment of 18 per cent interest per annum.<br />
(xiii) DG has further brought out that the dispute resolution by arbitration as<br />
per Clause 51 of the agreement shows that the arbitration proceedings<br />
are supposed to be held within DLF city and even employees or advocate<br />
of OP-1 can be Arbitrator to which the Allottees would not have any<br />
disagreement at a later stage and all decisions of such Arbitrator decision<br />
shall be final and binding upon the Parties.<br />
6.4 DG has concluded that the unfair conditions as mentioned above have been<br />
imposed on account of the market power/dominance which OP-1 enjoys in the<br />
market. As per scheme of the Competition Act, 2002, once determination of dominance<br />
in relevant market is done, then the acts mentioned in Section 4(2) are to be looked<br />
into. In case, the enterprises are found to be acting in violations of the acts mentioned<br />
in Section 4(2), the abuse of dominance is established. According to DG, here, the<br />
actions are to be proved and not that the actions also caused AAEC, since once<br />
violations mentioned in Section 4 are established; the abuse is also established not<br />
requiring further determination of AAEC (appreciable adverse effect on competition)<br />
in the market.<br />
6.5 DG has concluded that OP-1 in exercise of its market power and dominance has<br />
imposed unfair conditions of sale on consumers in violation of Section 4(2)(a) of the Act.<br />
6.6 DG based upon analysis of the factors as mentioned in Section 19(4) of the Act has<br />
stated that in addition to large market share, significant size and resources and<br />
superlative high economic power in the relevant market, OP-1 in the case has also<br />
derived market power from imperfect or asymmetric information. Relying upon the<br />
judgment in the case of Kodak, DG has concluded that market power can also arise<br />
from information that is imperfect or overly complicated which may change the choices<br />
that would be offered to consumers by way of functioning of the free market competition.<br />
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6.7 According to DG, the covert promise of handing over possession within a given<br />
time acted as barriers to the customers to go to any other developer given the brand<br />
name and brand value of OP-1. A costly exit scheme as in this case restricted<br />
competition in the market since the customers could not opt to exit for some other<br />
schemes looking at the costly proposition, it involved. Switching costs in the case<br />
have also created a barrier for consumers to act efficiently since in case the consumers<br />
wanted to exit from the scheme of OP-1, the fear of forfeiture of huge amounts already<br />
paid have acted as significant barriers, impacting the overall competition in the<br />
market. Further, the misdeclaration about the project not only affected consumers in<br />
the favour of the project and OP-1 but also acted as impediment towards free and<br />
fair competition; because many consumers who might have opted for other projects<br />
ultimately opted for booking in “Belaire”.<br />
6.8 DG has submitted that if the consumers regard a branded product as unqiue; it<br />
is likely that they will not shift to other products. This explains the behaviour of the<br />
Applicants in this case in opting for OP-1 as “brand”. Even if other players in the<br />
market are and were present, OP-1 as brand had great impacting influence on the<br />
Applicants-Allottees in the case. As regards question of relatively low barriers and<br />
ease of entry in the market raised by OP-1, DG has stated that even in markets with<br />
little entry barriers; sometimes irrational factors do dissuade entry. This is so because<br />
a potential entrant will prefer to secure gains, on its existing market, rather than to<br />
enter a new market, where gains may be potentially higher, but unknown and<br />
irregular.<br />
6.9 The DG has submitted that the exploitation of dominance and market power by<br />
OP-1 could be because of asymmetry in the information available not only for the<br />
buyers but also for the sellers in the relevant market. OP-1 has more information<br />
than other sellers giving it an edge and significant market power in the relevant<br />
market because of the historical factors and due to the fact that it has been in this<br />
market for decades.<br />
6.10 According to DG, pricing of the apartment, charges for preferential location,<br />
other charges hidden in the agreement are not easily discernable. Thus, by making<br />
pricing strategies complicated and by making the deliverables unknown beforehand,<br />
OP-1 may be said to have engaged in shrouding practices creating a bias in its<br />
favour.<br />
6.11 DG has brought out that to make markets work well, consumers must be able to<br />
assess, access and act on information. Simply providing more information (as OP-1<br />
has argued in course of proceedings that the agreements have been made so elaborate<br />
and the Applicants should have known about all Clauses beforehand) may not be a<br />
good solution when consumers have problems assessing and interpreting such<br />
information.<br />
6.12 According to DG, markets work well when there are efficient interface on both<br />
the demand (consumer) side and the supply (firm) side. On the demand side, informed<br />
consumers help in inducing competition by rewarding those firms which best satisfy<br />
their needs. On the supply side, competition provides firms with incentives to deliver<br />
what consumers want as efficiently as possible. While active and rational consumers<br />
and vigorous competition work together to deliver consumer benefits, the failure of<br />
the either side can harm the markets.<br />
6.13 DG has submitted that if competition among firms is diminished then consumers<br />
do not get what they want. However, apart from supply side, demand side is also<br />
a<br />
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c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
2011]<br />
Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)<br />
0275<br />
crucial since if consumers are less engaged in the buying process, then there would<br />
be lesser incentive among firms to deliver better quality products through innovation.<br />
As a result, overall competition at the market place will be reduced and consequently,<br />
lesser consumer welfare will be delivered by the market.<br />
6.14 DG has pointed out that in this case, along with market power and asymmetries<br />
in information between consumers and firms, behavioural biases have also played<br />
a role in market failure. According to DG, in order for consumers to drive competition,<br />
they ideally need to access information about the various offers available in the<br />
market, assess these offers in a well-reasoned way and act on the information by<br />
purchasing the good or service that offers the best value to the customer. In this case,<br />
according to DG, existence of thick apartment buyers’ agreement and complicated<br />
set of conditions therein, worked as significant barrier in optimal accessing,<br />
assessing and acting on information causing market failure and giving rise to market<br />
power to OP-1.<br />
6.15 According to DG, the key role of search costs in obstructing consumers’ ability<br />
to access information, and the impact this has on competition, has been shown by<br />
various scholars like P. Diamond in his famous paradox in which one finds many<br />
firms charging monopoly prices. Thus, according to DG, the argument that there are<br />
a number of players in the market and this has prevented OP-1 from exercising any<br />
market power does not hold good.<br />
6.16 According to DG, consumer biases had a bearing on behavior of OP-1. In the<br />
instant case, OP-1 made it difficult for consumers to perform optimal search by<br />
providing them inadequate information. The pricings conditions mentioned in the<br />
applications/agreements in the case are complex making it difficult for the consumers<br />
to perform optimal search impacting competition. According to DG, while OP-1<br />
made it more difficult for consumers to act to get the best deals, consumers also have<br />
displayed inertia due to overconfidence in their capacity to assess deals. OP-1<br />
knowing this inertia, has increased switching costs.<br />
6.17 DG has stated that the static competition has got affected in the case due to the<br />
failure of consumers to access, assess, and act on information because of complicated<br />
sets of agreement set in by OP-1, since such types of inaction provide little constraints<br />
on firms. Further, reductions in substitutability have the propensity to reduction in<br />
the intensity of competition resulting into poor delivery, higher prices and little<br />
choice for the consumers. Along with static competition, it has been stated by the<br />
DG that dynamic competition has also been affected within the market. One of the<br />
key benefits of competition is the role it has in ensuring that those firms that provide<br />
the best value continue in the market, while other perish. This role of competition<br />
gets considerably reduced when consumers reward only those that best play on<br />
their biases. The fact of product and process innovation also has got affected since<br />
OP-1 has not found enough incentive to come out with efficient and innovative<br />
products to win customers.<br />
6.18 DG has concluded that in the case of OP-1, not only the market share, size and<br />
resources of the company, its economic power but also its practices which have<br />
given it a superlative market power over all its competitors. This has helped it in<br />
affecting consumers in its favour and act without being restrained or constrained by<br />
the competitors. Exploitation of consumer biases, asymmetry of information, costly<br />
exit option, one sided agreement and unfair conditions imposed on the consumers<br />
affected the consumers as well as competition (both static and dynamic) at the<br />
market place.<br />
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6.19 In response to the notice of DG, response from OP-2 and OP-3 was not submitted.<br />
However, later on when investigation report was submitted, OP-3 (DTCP) submitted<br />
their response which was forwarded to the Commission by DG separately. The<br />
response of OP-2 and OP-3 on the allegations filed by the informant is discussed<br />
later in the Order.<br />
7. Forwarding of Investigation Report<br />
7.1 The Commission considered the investigation report submitted by the DG and<br />
passed an order, dated 2 nd December, 2010 to send a copy of the report to the opposite<br />
parties for filing their reply/objections.<br />
7.2 After the submission of investigation report, informants filed another application<br />
under Section 33 of the Act for interim Orders of the Commission on the following:<br />
(i) to freeze 20.87 acres of land based upon calculation of FAR and restrain OP-1<br />
from alienating or utilising the said land for the purpose other than for “the<br />
Belaire”<br />
(ii) to constitute an “Overseeing Committee” for supervising the completion of the<br />
project within a strict time frame<br />
(iii) to restrain OP-1 from collecting any amount on account of service tax<br />
(iv) to restrain OP-1 from levying and collecting the parking charges<br />
(v) to recalculate the consideration amount taking the super area maximum of<br />
18 per cent.<br />
7.2 It is pertinent to bring out here that OP-1 had filed an appeal under Section 53B<br />
of the Act before Competition Appellate Tribunal against the interim Order of the<br />
Commission dated 20 th September, 2010 in which various issues including the issues<br />
of jurisdiction were again raised. The Tribunal vide order, dated 17 th February, 2010<br />
disposed of the appeal by stating that they are not interfering in the matter since the<br />
matter has been fixed for the final disposal shortly by the Commission.<br />
7.3 In course of hearings before the Commission, the parties concerned were given<br />
several opportunities to make oral and written submissions. The parties were<br />
represented by their advocates. Mr. M.L.Lahoty and Mr. Paban Kumar Sharma<br />
represented the informant, while Mr. R. Narain along with Ashok Desai represented<br />
OP-1. Ms. Poonam, ATP (E&P) represented OP-2 while OP-3 was represented by<br />
Mr. Shivendra Dwivedi and Mr. Rajat Bhardawaj. OP-1 filed their submissions dated<br />
14 th February, 2011, 4 th March, 2011, 15 th March, 2011, 6 th April, 2011, 7 th April, 2011,<br />
27 th April, 2011, 12 th May, 2011, 19 th May, 2011, 6 th June, 2011, OP-2 and OP-3 filed<br />
their submissions on 8 th November, 2011 and 18 th October, 2010 respectively.<br />
The informant filed written submissions dated 27 th April, 2011, 11 th May, 2011,<br />
12 th May, 2011, 20 th May, 2011 and 6 th June, 2011. Parties were heard on various<br />
dates viz. 6 th January, 2011, 17 th February, 2011, 4 th March, 2011, 15 th March, 2011,<br />
24 th March, 2011, 6 th April, 2011, 7 th April, 2011, 27 th April, 2011, 11 th May, 2011,<br />
12 th May, 2011, 23 rd May, 2011 and 6 th June, 2011.<br />
8. Submissions of DLF Limited (OP-1)<br />
8.1 OP-1 upon receipt of DG’s report initially raised a point that all materials relied<br />
upon in the report of DG have not been supplied and till inspection of investigation<br />
records is granted, it may not be in a position to file its objections on the report of DG.<br />
It was also contended that the investigation report is incomplete in terms of Regulation<br />
20(4) and Regulation 21(1) of General Regulations of the Commission which<br />
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(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0277<br />
stipulate that DG shall submit complete records of investigation to the Commission.<br />
To this end, a writ petition was also filed in Hon’ble Delhi High Court with a<br />
request to quash the investigation report and also to issue directions to grant<br />
inspections. The writ petition was decided by Hon’ble High Court in which plea of<br />
quashing of investigation report was not allowed although upon the assurance<br />
given to the Court by the advocates of Commission and DG, directions were given to<br />
the effect that inspection be granted of the investigation records. Accordingly, OP-I<br />
on various dates, inspected the investigation records of the DG.<br />
8.2 The Commission passed an order, dated 9 th February, 2011 on the applications<br />
dated 6 th January, 2011 and 7 th January, 2011 of OP-1, rejecting its contention that<br />
since report of DG is incomplete, it cannot be acted upon. While passing this order,<br />
the Commission took cognisance of the fact that OP-1 had inspected the records of<br />
the Commission on various dates and also taken copies thereof after paying fees as<br />
per regulations.<br />
8.3 OP-1 in its replies on various dates denying all allegations have submitted the<br />
following contentions, many of which were submitted before the DG and have also<br />
been brought out in the preceding paras of this order.<br />
Issue of Jurisdiction<br />
8.4 That the basic terms and conditions agreed to between the company; and Allottees,<br />
were set out initially as terms and conditions of the booking application, submitted<br />
by the Allottes in the year 2006 and subsequently, in the Apartment Buyers’<br />
Agreement executed in the year December 2006/2007. All these terms and conditions<br />
were agreed to, prior to the coming in to force of Section 4 of the Competition Act<br />
(20 th May, 2009). The said Act is prospective and not retrospective. It cannot be even<br />
suggested that any condition was “imposed” by the company after 20 th May, 2009,<br />
so as to attract Section 4 of the Act. Further, prior to 20 th May, 2009, there was no<br />
legally recognised concept of a company having a “dominant position”. This concept<br />
is introduced by Section 4 as defined in Explanation (a) thereof. As such, even if a<br />
company can be said to have a dominant position, such position would only be on<br />
or after 20 th May, 2009.<br />
8.5 The conditions included in the agreement are “usual conditions” as per industry<br />
practice and thus cannot be said to have been imposed by abuse of dominant position.<br />
Since, the Clauses of the agreement objected to are usual Clauses as per industry<br />
practice and adopted by other competitors also in their respective agreements to meet<br />
competition, it is necessary to incorporate such Clauses in order to remain competitive.<br />
Such agreement is fully protected under the explanation to Sub-section 2(a) of Section 4<br />
of the Act.<br />
Determination of Relevant Market<br />
8.6 As regards, determination of relevant product market and relevant geographic<br />
market, OP-1 has stated that it has been done by DG on assumptions. The OP-1 has<br />
stated that alleged relevant market is not confined to purchase for “own residence”<br />
but also for investment for value appreciation and earning rental. OP-1 has contended<br />
that while making a decision to purchase residential properties including apartments,<br />
most purchasers who are “investors” consider different locations for investment<br />
where they estimate the appreciation in value to be higher and accordingly, the<br />
customers decide whether they should invest in Delhi or NCR or in any part of NCR<br />
including Gurgaon, NOIDA, Greater NOIDA, Faridabad, Ghaziabad, etc. DG has<br />
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ignored that the major consideration for a customer is to consider the alternative<br />
locations to compare which location would give him best appreciation in value and<br />
on that basis the location is decided. In this regard to support its contention, OP-1<br />
has also submitted an affidavit from a broker to buttress its arguments.<br />
8.7 OP-1 have also re-iterated its submissions before DG that there can be abuse<br />
within the meaning of provisions of Section 4(2)(a) of the Act only when an enterprise<br />
or group directly or indirectly imposes, unfair or discriminatory condition in purchase<br />
or sale of goods or service. It has been contended that the present agreement relates<br />
to “sale of an apartment” and not for “purchase of service”. It has also been stated<br />
that no apartment owner can be described as “Consumer” under Section 2(f)(ii) of<br />
the Act as the present agreement does not relate to hiring or availing of any service.<br />
8.8 As regards applicability of service tax as mentioned by DG, OP-1 has stated that<br />
service tax is levied with effect from 1 st July, 2010 on account of deeming provision<br />
brought out by Finance Act, 2010, and there is no deeming provision in relation to<br />
“service” under the Competition Act.<br />
Determination of Dominance<br />
8.9 OP-1 has stated that for determination of dominance, the term “Enterprise”<br />
alone is used and the term “group” is irrelevant. Further, mere mention in reports<br />
that a company is a leading company or that it enjoys a “Dominant Position” does<br />
not by itself prove that the enterprise enjoys a dominant position in the alleged<br />
relevant market.<br />
8.10 OP-1 has further stated that since there are a large number of players in Gurgaon,<br />
there is intense competition in the market, and therefore, no one enterprise can be<br />
said to enjoy a dominant position within the meaning of Explanation (a) to Section 4.<br />
8.11 Relying upon the reports submitted by Jones Lange Lassie, a research body,<br />
OP-1 has submitted that the market share determined therein based upon number of<br />
apartments as well as on the basis of the values thereof offered by the respective<br />
developers in NCR and Gurgaon is correct basis for determining the market share.<br />
OP-1 has also stated that sales figure of different developers is not available and<br />
also might not be relevant for determining the market share. According to OP-1,<br />
determination of market share by DG for Gurgaon by deriving market share based<br />
upon the All India Sales Figure is not correct.<br />
8.12 OP-1 has also pointed out that in determination of market share for All India as<br />
well for Gurgaon, DG has not considered a large number of companies. Further,<br />
data of CMIE based upon which DG has computed market share is unreliable as a<br />
number of companies have been omitted, it is based upon annual reports which<br />
contain sales figures of not only residential properties but also sales from other<br />
businesses also. Further, in several cases, only the “stand alone” sales figures have<br />
been considered ignoring sales figure of the group companies. Moreover, sales figure<br />
can be misleading because they are not reflected usually in the account books in the<br />
same year in which the properties are booked for sale. The sales figure recorded in<br />
the books of various developers would not represent the sales figure in the relevant<br />
year when bookings are done. As such, no reliable analysis of market share can be<br />
made on the basis of sales figure.<br />
8.13 OP-1 has also argued that market share determined by DG based upon a research<br />
report of E.Partibhan taking into consideration market capitalisation is not<br />
permissible. OP-1 has refuted that it has more than the double the market share of<br />
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(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0279<br />
Unitech and has also submitted that the comparison does not relate to the alleged<br />
relevant market of Gurgaon. It has been stated that in presence of a large number of<br />
other competing developers who have a market share in NCR as well as in Gurgaon,<br />
there can be no case to consider OP-1 to be in dominant position so as to act<br />
independently of competition. To buttress its arguments, OP-1 has also submitted<br />
that a look at licences given to various developers between 2002 and 2010,<br />
would show that the licences granted to OP-1 is only about 8 per cent of the Group<br />
Housing Projects.<br />
8.14 As regards, factors other than the market share mentioned in 19(4) of the<br />
Competition Act, 2002, OP-1 has also contended they need not be discussed since<br />
the assumption that the market share of DLF is the highest itself has no basis and<br />
thereafter consideration of the further factor becomes irrelevant. It has also been<br />
argued that the data based upon which factors mentioned in 19(4) of the Act have<br />
been analysed are incomplete and incorrect.<br />
8.15 OP-1 has stated that in the CMIE report relied upon by DG, Herfindahl Index<br />
indicated therein shows that the market is less concentrated and in such a market<br />
there can be no case for monopoly or dominant position.<br />
8.16 OP-1 has submitted that in order to determine the alleged contravention of<br />
Section 4, it is necessary to establish with evidence that it enjoys “Dominant Position”<br />
within the meaning of Explanation (a) to Section 4. It is not alleged in the<br />
“Information” as to which part of Explanation (a) to Section 4, which defines<br />
“Dominant Position”, is sought to be invoked. There is not even an allegation as to<br />
whether Clause (i) or (ii), or which part thereof is sought to be invoked to allege that<br />
OP-1 has a “Dominant Position” in the relevant market within the meaning of<br />
Explanation (a). Further, even with regard to “abuse of dominant position” it is not<br />
even alleged in the “Information” as to which part of Clause (a) of Sub-section (2) of<br />
Section 4, is sought to be invoked. No specific allegation or material is placed in<br />
support thereof and such “Information” cannot be acted upon.<br />
8.17 It has been stated by OP-1 that it does not enjoy “dominant position” within the<br />
meaning of explanation (a). In order to find out whether OP-1 has a “Dominant<br />
Position as defined in Explanation (a) to Section 4, it is to be established that it<br />
enjoys a position of strength, in the relevant market, in India, which enables it to act<br />
in a manner as provided in Clauses (i) and (ii) thereof. Even though in a general<br />
sense, in the context of describing the status of a leading company, it may be referred<br />
to as having a “Dominant Position”, in various statements/Annual Reports, etc.,<br />
such description would have no relevance, unless there is sufficient material to<br />
establish that the enterprise enjoys a “Dominant Position” in terms of the exhaustive<br />
definition thereof as set out in Explanation (a).<br />
8.18 OP-1 has further submitted that in a case like the present one, where no<br />
particulars are given in the “Information” as to how the OP-1 has a “Dominant<br />
Position as defined in Explanation (a) to Section 4”, no “satisfaction” can be arrived<br />
at to hold that the OP-1 has a “Dominant Position”. The burden of proof in this<br />
behalf is on the “Informant”, which has not been discharged.<br />
8.19 According to OP-1, there are many large real estate companies and builders in<br />
India, particularly in Northern India as well as in NCR and Gurgaon who offer stiff<br />
competition and give competitive offers to give a wide choice to the consumers.<br />
In such a situation the condition prescribed in Explanation (a) to Section 4, cannot<br />
be satisfied, by a mere bald statement made in the Information.<br />
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8.20 OP-1 has stated that since the allegations in the present case relate to purchase<br />
of residential apartments, the relevant property market would be the market relating<br />
to purchase and sale of “Residential Properties”. In that sense, the factual data and<br />
material placed on record establishes that OP-1 does not have a dominant position<br />
in respect of Residential property in Northern India or any other market.<br />
8.21 It has been contended by OP-1 that there are a large number of competitors and<br />
market is highly competitive. Even though OP-1 is a large builder, there are hundreds<br />
of other builders all over India as well as in Northern India including NCR, who<br />
offer residential apartments to prospective investors. This is so as competing products<br />
are available in abundance at different locations even in Northern India.<br />
8.22 According to OP-1, the conditions of offer of each builder are considered by the<br />
intending investor and then he makes up his mind as to which offer suits him.<br />
An intending investor may either buy a readymade apartment on original sale or<br />
resale or an apartment under construction or even a residential plot on which he<br />
may construct according to his own requirements. The choice of residential property<br />
available in the market has never been limited and apart from the residential<br />
properties offered by it there were a large number of other residential properties<br />
available in the market for the investor to choose from.<br />
8.23 OP-1 has submitted that one of the leading and renowned international<br />
property consultant Jones La Salle Meghraj (JLLM) has given data, based on the<br />
number of apartments launched in the last 2½ years by 150 real estate developers<br />
in the NCR region relating to NOIDA, Greater NOIDA, Ghaziabad, Faridabad,<br />
Gurgaon(NH8, Sohna Road, Golf Course Road, MG Road and Manesar) which<br />
shows that sales in units by it are far less as compared to total new sales in the<br />
years 2008, 2009 and 2010.<br />
8.24 It has also been submitted by OP-1 that in ICICI Direct Analyst Report dated<br />
5 th November, 2007, it has been mentioned that it has supplied projects worth<br />
6.7 million sq.ft. as against 16.8 million sq.ft. by Unitech and 10.7 million sq.ft.by<br />
Parsvnath. There are several other builders who had offered properties in NCR and<br />
other locations in Northern India. For the year ending March 2009, Parsvanath, one<br />
of the larger builders had a turnover of Rs. 762 crore and its stated land reserve is<br />
4,224 acres. Unitech has a stated land reserve of 11,179 acre. Its turnover in the year<br />
ending March 2009 was Rs. 3,316 crore. The stated land reserve of Ansal API is<br />
9,335 acres and that of Omaxe is 4,500 acres. Further, as per RBS (The Royal Bank of<br />
Scotland) Analyst Report dated 18 th January, 2010, produced and issued by<br />
ABN AMRO Bank NV India Branch, relating to Indiabulls Real Estate, which is a<br />
large developer, its land bank in NCR is stated to be 6.3 million sq.ft. These figures<br />
show that there are several competitors of a very large size and there are many more<br />
large size builders.<br />
8.25 It was also stated by OP-1 that as per the report published by Knight Frank who<br />
are well known reputed International real estate consultants, in Gurgaon itself,<br />
residential apartments available during the period 2009-2011 is estimated to be<br />
58.23 million sq. ft. As against the total availability of residential apartments in<br />
Gurgaon, OP-1 had only two existing properties being “The Belaire” and “Park<br />
Place,” in which apartments could be offered by it for sale. The total availability of<br />
residential apartments in these two projects from March 2009 onwards was only<br />
about 2.7 million sq.ft. Besides the sale of apartments in the aforesaid two existing<br />
projects, no other residential project has been launched by it in Gurgaon from 2009<br />
onwards.<br />
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(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0281<br />
8.26 OP-1 has further stated that as per Prop Equity, Goldman Sachs Research dated<br />
October 2009 details of new launches in Gurgaon show that there are a number of<br />
projects that were launched in Gurgaon during 2009. However, no new project was<br />
launched by OP-1. Further, a list of 83 members of CREDAI NCR obtained from their<br />
Website and a list of developers in NCR as per National Real Estate Development<br />
Council (NAREDCO) also indicates the number of Developers who are their members<br />
and operate in NCR, which is indicative of the fact that there are a large number of<br />
developers, who offer competition.<br />
8.27 Based upon above, it has been stated that the residential space offered by OP-1<br />
does not constitute any substantial portion of the total residential space offered by<br />
various developers.<br />
8.28 OP-1 has also contended when a consumer desires to buy an apartment, he has<br />
a free choice from various offers for investment and then to decide for himself, which<br />
offer is suitable to him keeping into consideration the terms offered. In such a situation,<br />
it cannot be said that a builder who may be large or leading, is in a position to<br />
operate independently of competitive forces or is in a position to affect competitors,<br />
consumers or the relevant market, in its favour The choice of residential property<br />
available in the market was never limited and apart from the Residential properties<br />
offered by OP-1, there were a large number of residential properties available in the<br />
market for the investor to choose from. This also included offers from Government<br />
and Public Sector Organisations like DDA, HUDA, NOIDA Development Authority,<br />
Ghaziabad Development Authority, etc.<br />
8.29 In support of the submissions that OP-1 is not a dominant player, residential<br />
Market Research report prepared by Jones Lang LaSalle (JLLS) was submitted by it<br />
based upon which it has been stated that in respect of residential properties, it<br />
cannot be considered to have a larger share of the market either in NCR or even in<br />
Gurgaon. It has further been stated that while maintaining that there is no separate<br />
identifiable and definable segment as luxury, and the market share is to be<br />
determined on the basis of the total Residential Properties, as per the criteria of<br />
Luxury residential segment adopted in the report prepared by Jones Lang LaSalle<br />
(JLLS) shows that there are other competitors who have a much larger market share<br />
in NCR as well as Gurgaon.<br />
8.30 OP-1 has contended that the above materials have not been considered and<br />
dealt with by the DG while arriving at his findings in the investigation report. DG<br />
has rejected the market share reports of JLL stating that they are not based upon<br />
sales figure without appreciating that in order to determine competition, it is<br />
significant to consider the competing offers made by various developers and for that<br />
purpose it is appropriate to consider the number of apartments offered by the<br />
competing developers.<br />
8.31 In course of proceedings before the Commission, OP-1 has also submitted a<br />
report by G:ENESIS to establish that it is not a dominant player. Further, orders of<br />
the Commission passed in the case of M/s BPTP and M/s Parshvnath Developers P. Ltd.<br />
also have been relied upon to state that it does not enjoy position of dominance.<br />
Besides, the Judgment of EU in case of Gottrupp-Klim (1994 ECJ CELEX LEXIS 55,<br />
1994 ECR I-5641) has also been relied upon to establish that it is not a dominant<br />
player.<br />
8.32 OP-1 has argued that DG has referred to the factors mentioned in Section 19(4)<br />
of the Act to determine dominance. However, these factors are only indicative and<br />
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relevance of each factor has to be considered in the light of overall facts and market<br />
conditions in each case. The case of OP-1 is that keeping in view features of the<br />
present industry and the facts of the case in respect of which overwhelming material<br />
has been placed on record, it cannot even be suggested that any of the factors referred<br />
to in Section 19(4) would even indicate much less establish, that OP-1 enjoys a<br />
dominant position within the meaning of Explanation (a) to Section 4. Further, the<br />
data relied upon belongs to a date prior to 20 th May, 2009. OP-1 has suggested that<br />
any data prior to 20 th May, 2009 as relied upon by DG is not relevant since the<br />
question of dominance could be examined taking into account events and facts that<br />
have occurred after that date.<br />
8.33 OP-I has also contended that the data relied upon by DG for determining dominance<br />
while analysing factors mentioned in Section 19(4) are incomplete, not authentic, and<br />
therefore, not reliable. No conclusion can be drawn based upon such data.<br />
Contentions on Abuse of Dominance<br />
8.34 On the issue of abuse of dominance, OP-1 has stated that merely alleging abuse<br />
is not relevant, unless it is established that the alleged unfair/discriminatory<br />
conditions are imposed by abuse of dominant position. The conditions in the<br />
agreement were usual Clauses introduced as per industry practice and cannot be<br />
said to be “imposed” by abuse of dominant position.<br />
8.35 OP-1 has stated that while dealing with the conduct of OP-1, DG has not<br />
considered the large number of benefits given voluntarily by OP-1 to the Allottees.<br />
OP-1 has cited Timely Payment Rebates, Advance Payment Rebates, upgradation of<br />
specifications of the buildings without any extra charges as some of the benefits<br />
extended to the Allottees. It has also been brought out that after revision of plan by<br />
increasing the number of floors from 19 to 29, rate of compensation was doubled<br />
from Rs. 5 per sq. ft. to Rs. 10 per sq. ft. Additionally, OP-1 has also brought out that<br />
prices agreed to with the apartment Allottees were “escalation free” and any increase<br />
in costs of material and labour charges, etc. on account of delay in construction was<br />
to be entirely borne by OP-1.<br />
8.36 It has also been brought out by OP-1 that cancellation of allotment was done<br />
only in cases of default in payments of dues and was done in accordance with the<br />
terms of the agreement. As regards, delay in possession, it has been submitted that<br />
there is no delay in handing over possession in terms of the agreement and finishing<br />
work is in progress and possession would be given immediately upon receipt of the<br />
occupation certificate. Relying upon the Judgment of Supreme Court in case of<br />
Bangalore Development Authority v. Syndicate Bank 1 (2007) 6 SC 711, OP-1 has submitted<br />
that in contract involving construction, time is not the essence of the contract unless<br />
specified. It has also been brought out that in terms of judgment of Supreme Court in<br />
case of DLF Universal Limited v. Ekta Seth 2 (2008) 7 SCC 585, no delay will accrue<br />
upon the Appellant due to delay in handing the possession. Having not exercised<br />
specific right to cancel the agreement, no grievance can be made by the Allottees on<br />
account of delay in handing over possession.<br />
1 Ed.: MANU/SC/2718/2007: AIR 2007 SC 2198: 2008 (3) BomCR 808: (2007) 3 Co MPLJ<br />
58 (SC): II (2007) CPJ 17 (SC): 2007 (2) CTLJ 52 (SC): (2008) 1 GLR 624 (SC): JT 2007 (8)<br />
SC 106: 2007 (5) KarLJ 145: (2007) 6 MLJ 975 (SC): 2007 (8) SCALE 200: [2007] 7 SCR 47:<br />
2007 (2) UJ 789 (SC)<br />
2 Ed.: MANU/SC/7830/2008: AIR 2008 SC 3066: III (2008) CPJ 44 (SC): (2009) 2 MLJ 93<br />
(SC): 2008 (10) SCALE 310: [2008] 86 SCL 28 (SC)<br />
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(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0283<br />
8.37 OP-1 has further stated that all approvals and clearances are in place for the<br />
project. It has also been argued that there is no impediment in law that a project<br />
cannot be launched without submitting the building plans/lay out plans of the<br />
project. OP-1 has also stated that with regard to increase in number of floors, in view<br />
of the specific provision contained in the terms and conditions of the application for<br />
booking as well as in the agreement, the Allottees not only had intimation that the<br />
number of floors/height may be increased but had also specifically recorded their<br />
consent therein.<br />
8.38 On the issue of violations of FAR and Density Per Acre, it has been contended<br />
that the conclusions drawn by DG are incorrect since correct basis for determining<br />
the same has not been followed. FAR and Density Per Acre needs to be calculated on<br />
the basis of approved Zoning Plan of Phase-V, Gurgaon and both FAR and Zoning<br />
Plan are within the permissible limits. It has further been contended that alleged<br />
violations of Section 6(2) and Section 13 of Haryana Apartment Ownership Act, 1982<br />
are incorrect and misconceived since declarations under the Act are yet to be filed.<br />
8.39 OP-1 has also submitted that since it was contemplated that number of<br />
floors/height may be increased in future, the structural designs and foundation<br />
agreement were made at the initial stages on that basis only and there is no infirmity<br />
in terms of structural strength. Further, OP-1 has also argued that consideration of<br />
these matters in the present proceedings is irrelevant for the purpose of the alleged<br />
contravention of Section 4 of the Act.<br />
8.40 OP-1 has also given replies on the different Clauses of the agreement referred to<br />
in the DG’s report. As regards, representation J&K, it has been argued that the<br />
Applicants have satisfied themselves regarding the title of the property, and therefore,<br />
no investigation in this behalf would be done by him. Further, there is no question of<br />
changing the zone plan, usage pattern, etc., when the land use of the building has<br />
been declared as residential.<br />
8.41 As regards representation F of the agreement, it has been contended that there<br />
is no issue of reduction in the land area since the construction of the building has<br />
already been put up. As regards charges like PLC, it has been contended that the<br />
Allottees were fully aware of all the charges at the time of making payments of<br />
instalments. Similarly, as regards super area, it has been stated that it is tentative<br />
and as per agreement it is to be decided at the time of completion of the project.<br />
8.42 On the issue of exit option, OP-1 has contended that DG has proceeded on<br />
assumption that whenever an apartment is booked, an exit option must be provided,<br />
although there is neither any such requirement of law nor is it the industry practice.<br />
8.43 OP-1 has also stated that findings on different Clauses of agreement mentioned<br />
in the report of DG as unfair and discriminatory are erroneous. It has been stated<br />
that the basic terms and conditions in the agreement are similar to the terms and<br />
conditions contained in the agreements of other competitors and they are as per<br />
industry practice. Further, the terms and conditions agreed to between the parties<br />
are binding as held in the case of Bharathi Knitting v. DHL Courier World Wide Express<br />
Courier 3 1996 4 SCC 704. Such terms of agreement could not have been described as<br />
incorporated by “abuse of dominant position”.<br />
i<br />
3 Ed.: MANU/SC/0628/1996: 1996 VIII AD (SC) 312: AIR 1996 SC 2508: [1996] 87<br />
CompCas 886 (SC): JT 1996 (6) SC 254: (1996) 2 MLJ 146 (SC): 1996 (5) SCALE 142:<br />
[1996] Supp 2 SCR 653<br />
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Reply filed by Department of Town Country and Planning, Government of<br />
Haryana-OP-2<br />
8.44 OP-2 has stated vide response dated 8 th November, 2010 that the permissions to<br />
OP-1 in the case have been granted as per the statutes applicable. The issues involved<br />
in the case are generally bilateral between the two parties. It has also been stated<br />
that no violation of Haryana Apartment Ownership Act, 1983 has come to the notice<br />
of the Department. It has also been submitted that under Punjab Schedule Roads<br />
and Controlled Areas Restriction of Unregulated Development Act, 1963 only<br />
compoundable violations are considered.<br />
8.45 Regarding common areas, it has been stated that the proportionate share in the<br />
ownership of the property is governed by the provisions of the Haryana Apartment<br />
Ownership Act, 1983 and is not the sole discretion of the colonizer. Further, the<br />
licensee is bound by any conditions imposed by Department of Town Country and<br />
Planning. OP-2 has also denied that any building plans have been approved in<br />
violation of permissible FAR and density per acre.<br />
Reply filed by Haryana Urban Development Authority - OP-3<br />
8.46 OP-3 filed its replies on 18 th October, 2010 to the Commission. According to<br />
OP-3, it is neither a necessary party nor a proper party to the present proceedings. It<br />
has been stated that in case of residential colonies and group housing complexes<br />
developed by private colonizers, land is purchased by the colonizer itself from the<br />
land owners and then request for grant of License is made to Director, Town &<br />
Country Planning Department, Haryana, which is granted on fulfilling all the terms<br />
and conditions of the Town & Country Planning Department. It has no role to play<br />
in this whole process. OP-3 only provides master services like, water supply,<br />
sewerage system, drainage system and master roads for which external development<br />
charges are charged from the colonizer at the time of issuance of license and the<br />
same are deposited in HUDA account. It is not involved in any decision making<br />
process towards the grant of sanction/approval of the Building Plans/Layouts of<br />
OP-1 as alleged by the informant.<br />
8.47 All sanctions of building plans and other related approvals are obtained by the<br />
colonizer directly from OP-2 as per the provisions of The Punjab Scheduled Roads<br />
and Controlled Areas Restriction of Unregulated Development Act, 1963, its rules<br />
and zoning plan framed there under and not as per HUDA (Erection of Buildings)<br />
Regulations, 1979.<br />
9. Arguments of the informant<br />
9.1 The Informant submitted a detailed response on 12 th May, 2011 with reference to<br />
DLF’s note submitted to Commission on 4 th March, 2011 and Jones Lang Lasalle<br />
(JLL) Report and Genesis Report submitted by DLF. The informant also submitted a<br />
report from QuBREX in support of its contentions. The gist of the informant’s<br />
contentions is given below:<br />
Comments on submission of DLF<br />
9.2 The informant contended that sales figures are the best way to calculate market<br />
share. It was pointed out that the DG as well as the Genesis Report submitted by<br />
DLF admits this assertion. The informant argued that what is important in the case<br />
is to establish how DLF compares to its nearest competitors. It was contended that it<br />
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0285<br />
is quite clear from various data sources that there is no developer that comes close to<br />
DLF particularly in the geographic market of Gurgaon and in product market of<br />
high-end residential units.<br />
9.3 It was submitted that the DG has done a detailed analysis to establish DLF’s<br />
market share using publically available sources. DLF was given ample opportunity<br />
to provide their view of the market share. They declined to submit market share<br />
based on sales figures and instead provided JLL report estimating market share<br />
based on non-standard metric of active stock.<br />
Comments on JLL report<br />
9.4 The informant contended that the Genesis and JLL model use a proxy called<br />
“active stock” for calculating market share. It was argued that this questionable<br />
artefact from the JLL model based on active projects is a flawed parameter. The<br />
informant pointed out that active stock has been given at least 3 different definitions<br />
between the JLL and Genesis Report and in some cases this definition may actually<br />
be contradictory to what it is purporting to measure.<br />
9.5 It was further argued that not only the calculations by JLL in its reports do not<br />
represent reality; they are based on data unavailable for further discussions or<br />
scrutiny. It is simply not possible for the Commission to accept these numbers as<br />
sacrosanct when the source of data and the analysis is not open to scrutiny.<br />
Comments on Genesis Report<br />
9.6 It was submitted that the Genesis Report is a paid study commissioned by DLF.<br />
It was averred that Genesis is no expert in real estate business, and hence, is relying<br />
on data provided to it by DLF and JLL and it, therefore, a biased report.<br />
9.7 The informant claimed that there is a general theme of non-cooperation<br />
throughout the report. It was contended that DLF has made several public statements<br />
in statutory documents such as Red Herring Prospectus, its annual reports, quarterly<br />
presentations to financial analysts, etc. These public statements are completely<br />
contrary to what has been said in the Genesis Report. It was argued that DLF is<br />
trying to change its publicly stated position in legal documents. It was strongly<br />
argued that based on DLF’s public statements in its Red Herring Prospectus and<br />
annual reports, DLF is a dominant player in the relevant market. Moreover, DLF’s<br />
market share estimates based on active stock concept need to be rejected as it is not<br />
a standard metric for calculating market share.<br />
9.8 According to the informant, DLF’s track record, brand and preferential locations<br />
make it the most attractive builder in the relevant market segment. New builders<br />
that are just entering the market are no substitute for DLF’s offerings in the market.<br />
DLF’s combined strength in both commercial as well as residential segments gives<br />
it added advantage.<br />
9.10 The informant stated that leveraging its dominant market position and its<br />
control over the marketing channels, DLF traps the customers into buying what<br />
appears to be an excellent product. It then forces them to pay money without securing<br />
any government approval. Under the protective cover of a completely one-sided<br />
contract, locked customers who have already invested a lot of money and have no<br />
way out, it then manipulates the entire process to its own advantage. This hurts<br />
consumers such as the Petitioners.<br />
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9.11 It was also argued that DLF is certainly operating independent of its competitors<br />
when it claims that it does not know or care about its competitor’s market share.<br />
Also, DLF sets the agenda for rest of the market. It has established the practice of<br />
offering contracts with several abusive Clauses to the customers and of marketing<br />
and collecting money without having all the Government approvals.<br />
9.12 The informant claimed that instead of leading the industry to more balanced,<br />
customer-supplier relationship because of its market leader position, DLF has chosen<br />
to establish a number of abusive industry practices which it now claims it is forced<br />
to comply with.<br />
9.13 Further, the informant alleged that if anyone dares to challenge its abusive<br />
ways in any of the Court, DLF fights aggressively and frustrates the buyer who<br />
either runs out of money, time (he dies) or patience.<br />
9.14 It was contended that rest of the industry merely treads the trail blazed by DLF<br />
while the consumers have largely given up and have come to accept that “that all<br />
the developers are the same”.<br />
Gist of the report of QuBREX-QuBit Real Estate exchange dated 8 th May, 2011<br />
submitted by the informant:<br />
9.15 The Genesis and JLL model use a proxy called “active stock” for calculating<br />
market share. This questionable artifact from the JLL model based on active projects<br />
is a flawed parameter. The active stock has at least three different definitions between<br />
the JLL and Genesis Report and in some cases this definition may actually be<br />
contradictory to what it is purporting to measure.<br />
9.16 The approaches taken by JLL and Genesis in their reports of March 2011 are<br />
erroneous and misleading. Neither the data of JLL nor the methodology of JLL and<br />
Genesis can be relied upon.<br />
9.17 The reports of JLL and Genesis present a completely wrong and misleading<br />
concept of market share by basing their analysis on the “Active Project” and<br />
“Active Stock” notion.<br />
9.18 The data on which “Active Stock” calculations are done for market share is<br />
suspicious, and is presented with a facade of accuracy that is not possible because<br />
of the very opaque nature of the property market, and the inherent difficulty of<br />
collecting the “Active Stock” data accurately. The fact that the underlying data<br />
provided by JLL has not been audited or verified, nor shared by JLL with anyone,<br />
even Genesis, gives the impression that the data has been fabricated and contrived.<br />
9.19 The model of taking arbitrary “market share” snapshots on a yearly basis<br />
without regard to the long and multi-year process by which apartments are marketed,<br />
booked, constructed, completed, and possession handed over, is erroneous. Also,<br />
the arbitrary snapshots in time are limited views, without context of the past and<br />
future of the market place. Further, by narrowly defining “market share” as newly<br />
“launched projects” from year-to-year, and ignoring the “completed projects” market<br />
share over the years, JLL & Genesis give a partisan picture of the market share.<br />
9.20 Most importantly, the models of JLL and Genesis bias the study by ignoring the<br />
importance commercial property has in influencing the purchase decision of a<br />
residential property. This is done by asking the wrong rhetorical question about<br />
“substitutability” of commercial versus residential properties and then summarily<br />
ignoring the commercial market by glibly concluding that commercial property is<br />
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(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0287<br />
not substitutable with residential property. This wrong way of looking at the<br />
commercial property and residential property relationship leads both JLL and<br />
Genesis to conveniently ignore the role commercial property plays in the decision of<br />
buying residential property, and consequently leads them to underplay the<br />
importance of Gurgaon being the Relevant Geographic Market.<br />
9.21 A large part success of DLF in the residential market is due to its almost absolute<br />
dominance in the commercial sector. This is an outcome of DLF’s “walk to work”<br />
concept which, as DLF says on its website, it pioneered. By building world class<br />
office spaces that it does not sell but leases to top companies, it creates a magnet in<br />
its land banks, in and around which people desire to own a residential property -<br />
whether for self or for investment. The proximity of over 3,000 acres of its lands to<br />
the Delhi boarder is a plus. Combined with office spaces on that land that draw<br />
companies out of Delhi into Gurgaon, it creates a chain effect of drawing the<br />
employees of the companies to DLF houses in Gurgaon. This is of relevance under<br />
Section 19(6)(b) of the Act that requires looking at local specification requirements.<br />
9.22 The location, the proximity to the commercial offices and retail spaces, social<br />
infrastructure like the DLF Golf course, and with its own rapid Metros, own flyovers,<br />
even its own roads, DLF is heading to solidify its hold on Gurgaon.<br />
9.23 DLF has pioneered many aspects of the real estate business in Gurgaon which<br />
indicate its strength and ability to almost act independently of what the competitor<br />
may or may not do. Some of business practices pioneered by DLF that can be<br />
considered by the Commission under Section 19(4)(m) are delay penalty, early<br />
payment discount, timely payment discount, investor locking in terms of buyers<br />
agreements, one PAN one FLAT, selling by invitation only, etc.<br />
9.24 The Informant’s have further filed a clarification dated 6 th June, 2011 on factual<br />
errors in submission of DLF regarding violation of FAR, super area, charges for<br />
parking lot, alleged delay of 24 months for 19 floor plan, extra floors, cancellation<br />
and forfeiture of money and service tax.<br />
10. Oral arguments of Informants<br />
10.1 Shri M.L. Lahoty, Advocate appeared for the informants before the Commission<br />
on 10 th May, 2011 and made oral submissions. Shri Lahoty argued that after the<br />
admission, proclamation and declaration of DLF in its annual general meetings, red<br />
herring prospectus read with Section 62 of the Companies Act, 1956, there is nothing<br />
left to prove about dominant position of DLF. He submitted that in terms of Section 18<br />
read with preamble of the Act, it is the duty of the Commission to protect the interest<br />
of consumers as the interest of consumers is being affected adversely by the acts of<br />
DLF. He drew the attention of the Commission towards the Judgment of Hon’ble<br />
Supreme Court in the matter of Competition Commission of India v. Steel Authority of<br />
India Limited and Anr. 4 (specifically, Para 9 and 29 of the judgment). He submitted<br />
that the DLF cannot take excuse regarding its unfair practices on the ground that the<br />
same are prevalent in the entire market. He also submitted that if such practices are<br />
prevalent across the market, the Commission may take action against other players<br />
also, but it does not lessen the liability of DLF with respect to its own unfair practices.<br />
i<br />
4 Ed.: MANU/SC/0690/2010: 2010 CompLR 61 (Supreme Court): JT 2010 (10) SC 26:<br />
(2011) 2 MLJ 271 (SC): (2010) 10 SCC 744: [2010] 103 SCL 269 (SC): [2010] 11 SCR 112:<br />
2010 (8) UJ 4093 (SC)<br />
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10.2 With respect to factors given in Section 19(4) of the Act, Shri Lahoty submitted<br />
that the factors given in the Section are not a limitation on the powers of the<br />
Commission for determining dominant position of an enterprise. He invited the<br />
attention of the Commission towards the phrase “have due regard to” and submitted<br />
that the phrase has been used by the law makers intentionally to empower the<br />
Commission to take into consideration other factors also. With the same intention,<br />
Clause (m) has been provided empowering the Commission to consider any other<br />
factor considered relevant for the enquiry. He emphasised that a combined reading<br />
of the statement of objects and reasons on Competition Bill, 2002, Section 18 and<br />
preamble of the Act shows that the Commission has been given ample powers to<br />
protect the interests of the consumers. He gave further emphasis to Para 9 and 25 of<br />
the Judgment of Hon’ble Supreme Court in Jindal v. SAIL wherein the Hon’ble<br />
Supreme Court has mentioned the vast and wide powers of the Commission.<br />
10.3 He invited the attention of the Commission towards the Judgment of Hon’ble<br />
Supreme Court in Shri Sitaram Sugar Company Ltd. and Anr. v. Union of India and Ors. 5<br />
(1990) 3 SCC 223 wherein, in Para 29 Justice Sabyasachi Mukherjee has explained<br />
the phrase “having regard to” and held that the Government can consider any other<br />
matter/factor as there is a difference between “having regard to” and “having regard<br />
only to”. “Having regard to” empowers and does not restrict the authorities concerned<br />
from taking into consideration any other relevant factor. He submitted that the<br />
five-Judges Bench of Hon’ble Supreme Court headed by Hon’ble Chief Justice Shri<br />
Sabyasachi Mukherjee at Para 77 in the PTC India Ltd. v. Central Electricity Regulatory<br />
Commission 6 (2010) 4 SCC 603 case has affirmed and confirmed the position of Sitaram<br />
Sugar case by holding that the authorities can take other matters in consideration.<br />
He submitted that the mention of words “or otherwise” in Section 4(g) of the Act<br />
clearly intends that anything left can be covered by the residue. On the basis of the<br />
foregoing arguments he emphasised that factor mentioned in Section 19(4)(a) of the<br />
act is not the sole repository for determining the dominant position.<br />
10.4 He further submitted that clauses of the agreement with the apartment buyers<br />
reveal the dominant position of the DLF. He argued that if a party to the agreement<br />
in a signed document excludes itself from the obligations and liabilities and puts it<br />
heavily on the apartment Allottees, as is the case with DLF, it is only because of its<br />
dominant position. He submitted that DLF in its own declaration and proclamation<br />
in red herring prospectus, etc. claims itself to be largest in terms of Revenue, earnings<br />
and market capitalisation. It further claims to have leadership position in India,<br />
being one of the top five companies of the world and the largest real estate developer<br />
in the world. He also submitted that the DLF in its letters to the informants also<br />
mentions that it is developing the largest township of the Asia.<br />
10.5 With regard to the obligation of those who issue prospectuses inviting<br />
application for shares he referred to Palmer to mention that:<br />
Those who issue a prospectus, holding out to the public the great advantages<br />
which will accrue to persons who will take shares in a proposed undertaking,<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
5 Ed.: MANU/SC/0249/1990: AIR 1990 SC 1277: (1990) 2 Co MPLJ 18 (SC): JT 1990 (1) SC<br />
462: 1990 (1) SCALE 475: [1990] 1 SCR 909<br />
6 Ed.: MANU/SC/0164/2010: AIR 2010 SC 1338: 2010 3 AWC (Supp) 2709 SC: 2010 (5)<br />
BomCR 762: 2010 ELR (SC) 269: JT 2010 (3) SC 1: 2010 (3) SCALE 55: [2010] 3 SCR 609:<br />
2010 (3) UJ 1203 (SC)<br />
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0289<br />
and inviting them to take shares on the faith of the representations therein<br />
contained, are bound to state everything with strict and scrupulous accuracy,<br />
and............ (Palmer’s Company Law 24 th Edition, Page 332).<br />
10.6 To establish the dominant position of DLF, Shri Lahoty further relied upon<br />
observations of the Court of Justice of the European Communities in the matter of<br />
AKZO Chemie BV v. E.C. Commission wherein, the Court has observed that once<br />
AKZO itself admitted that it has the most highly developed marketing organisation,<br />
both commercially and technically, and wider knowledge than that of its competitors<br />
the pleas put forward by AKZO in order to deny that it had a dominant position<br />
within the organic peroxides market as a whole must be rejected. He contended that<br />
after its own admission, proclamation and declaration the DLF now cannot argue<br />
that the statements made by it were general in nature. He, on the basis of various<br />
annual reports of the DLF, red herring prospectus and statement of DLF’s Chairman<br />
in its Annual General Meetings, emphasized that the same are sufficient to prove<br />
the dominant position of DLF.<br />
10.7 He further submitted that the DLF has committed a fraud on Allottees as after<br />
entering into agreement with the apartment Allottees the entire structure of the<br />
building was changed. He claimed that the apartment Allottees are still not aware<br />
as to when the project is to be completed and after investing huge money they are<br />
suffering for no fault of their own. He submitted that the clauses of the apartment<br />
buyer’s agreement regarding abandonment of project, tripartite agreement regarding<br />
maintenance, arbitration Clauses, etc. deprive the rights of the apartment buyers.<br />
He further submitted that any alteration in the agreement is not allowed and the<br />
Allottees have to sign their agreement as a “captured customer”.<br />
10.8 He further submitted that for imposing such unfair conditions upon apartment<br />
Allottees the DLF cannot take the plea that the Allottees have signed the agreement<br />
and that the practices adopted by DLF are the general industry practices. He invited<br />
the attention of the Commission towards the Judgment of Hon’ble Supreme Court in<br />
Central Inland Water Transport Corporation Ltd. and Anr. v. Brojo Nath Ganguly and<br />
Anr. 7 (1986) 3 SCC 156 and argued that parties to the agreement should be on equal<br />
footing and with same bargaining power. He submitted that the Hon’ble Supreme<br />
Court at Para 79 of its judgment has quoted Chitty that freedom of contract is a<br />
reasonable social ideal only to the extent that equality of bargaining power between<br />
contracting parties can be assumed. He argued that if one party to the agreement has<br />
no choice the other party cannot take advantage only because there is a signed<br />
agreement between the parties.<br />
10.9 He further contended that even if the practices adopted by DLF are industry<br />
practices then it should be taken into consideration as to who is following whom. In<br />
view of the facts admitted, proclaimed and declared by DLF itself, it is the DLF<br />
which, being the market leader is responsible for such practices. He submitted that<br />
the DLF has been the first mover and market leader and it is an observed phenomenon<br />
that the market players follow what the leader does. He further submitted that if the<br />
practices are prevalent throughout the industry the Commission is empowered to<br />
take action against all of them but that never absolves DLF from its liabilities.<br />
i<br />
7 Ed.: MANU/SC/0439/1986: AIR 1986 SC 1571: (1986) 3 Co MPLJ 1 (SC): 1986 LabIC<br />
1312: (1986) II LLJ 171 SC: 1986 (1) SCALE 799: [1986] 2 SCR 278: 1986 (2) SLJ 320 (SC)<br />
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10.10 He further dealt with the contentions of DLF regarding the agreements having<br />
been executed prior to 20 th May, 2009, i.e. the date of enforcement of the Act and that<br />
the DLF is not providing any service to the apartment buyers. He submitted that on<br />
the date of enforcement of the provisions of Section 3 and 4 of the Act the project was<br />
under process, the payments were incomplete and thus the DLF’s contention<br />
regarding the enforceability of the provisions of the Act in the matter does not<br />
hold good.<br />
10.11 With respect to the question of “service” he invited the attention of the<br />
Commission towards Para 5.4.13 of the DG’s investigation report and emphasised<br />
that DLF Ltd. and its group entities are providing service to the consumers while<br />
developing and selling apartments to them. He also invited the attention of the<br />
Commission towards the wrong statement of DLF regarding sanction of the projects<br />
and argued that DLF has committed a fraud on the apartment buyers.<br />
10.12 With regard to the concept of “active stock” as coined by DLF Shri Lahoty<br />
submitted that the basis of “active stock” taken by DLF is erroneous as the<br />
“active stock” cannot be the inventory. As per him the “active stock” should always<br />
be finished goods and not inventory. He further submitted that the definition of<br />
“active stock” is different in the three reports submitted by DLF. He further attacked<br />
the Genesis Report and submitted that DLF’s income is not comparable with Unitech<br />
(as given in Genesis Report) and that the DLF’s size and resources give it advantage<br />
over its competitors. With respect to dependence of consumers upon DLF, he<br />
submitted that even in a situation where all the developers are adopting abusive<br />
clauses, one would go to DLF and not to some small developer, in view of its monopoly<br />
in the real estate market.<br />
10.13 In conclusion, Shri Lahoty forcefully contended that DLF Ltd. was dominant<br />
in terms of Section 4 of the Act and had abused its dominant position in contravention<br />
of the provisions of the Act.<br />
11. Oral arguments of DLF<br />
11.1 Shri Ravinder Narayan, Advocate appeared for DLF and submitted a written<br />
argument dated 23 rd May, 2011. He also made submissions during his oral argument<br />
before the Commission as under.<br />
11.2 The data adopted in the QuBREX report is incorrect and the authenticity of the<br />
data is doubtful and not acceptable. Further, the methodology adopted for<br />
determining the market share of the respective developers is untenable and is liable<br />
to be rejected.<br />
11.3 The market share can only be determined with reference to a particular point in<br />
time and as such it is determined on an annual basis. This is so, as market share<br />
may fluctuate. A particular developer may have a larger market share in one year<br />
and may not have the same market share in the other years. As such, market share is<br />
required to be determined on an annual basis.<br />
11.4 The methodology adopted in the QuBREX report is not to determine market<br />
share on annual basis for each year under consideration, but to determine market<br />
share on a cumulative basis by including all projects from the very beginning for<br />
15 to 20 years. If such a methodology is adopted, then a developer, who may be<br />
commanding a large market share in the last say 3 years, would have a very<br />
insignificantly low market share since he had no project in the years prior to say<br />
2007. Another developer who had a large market share 15 years earlier but does not<br />
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have any significant market share in the last three years or so, would still be<br />
considered as having a large market share. This methodology of determining market<br />
share for a period ranging from 15 to 20 years completely distorts the market share<br />
relevant for any particular year.<br />
11.5 The fallacy in adopting the above methodology is apparent from taking a<br />
hypothetical situation where a developer may have launched a number of projects<br />
over a period of several years, say from 1991 up to 2006, but did not launch any<br />
project in the year 2007 and may even exit from the business. On the basis of the<br />
methodology of cumulative determination of market share based on all the past<br />
years, such a developer who has launched no project or has exited from the business,<br />
may still be considered to have a high market share in the year 2007 based on the<br />
launches of the earlier years. Such a developer may launch a few projects in<br />
subsequent years while there are other developers who enter the market and on any<br />
yearly basis, launch a much larger number of projects. Since, such new developers<br />
would have no launches for the earlier 15 to 20 years, their market share for the<br />
relevant year would be insignificant as compared to the developer who has been in<br />
the market for a number of years but has not launched substantial projects in the<br />
subsequent years.<br />
11.6 Apart from the above fallacy, for the purpose of categorising the apartments, on<br />
the basis of capital value thereof, as well as for the purpose of determining the<br />
market share on the basis of such capital value (again on cumulative basis for the<br />
entire past years), the value of all apartments is taken as in March 2011, even though<br />
the apartments may have been launched 15 to 20 years ago. Any calculation or<br />
share determined on the basis of the alleged capital value of March 2011, would<br />
necessarily lead to absurd results.<br />
11.7 When a customer invests in residential apartment, he not only looks at the new<br />
launches which are offered, but also the comparable apartments which are available<br />
in the secondary market, which are substitutable properties.<br />
11.8 The apartments in the secondary market may be those which are still under<br />
construction (since many apartments are sold while still at booking stage) or those<br />
which are completed. In fact, if a completed apartment is available for sale in the<br />
secondary market, a customer may prefer that to avoid the risk involved in booking<br />
an apartment which may take a few years for completion, though the price of the<br />
completed apartment may be higher than the apartment which is yet to be<br />
constructed.<br />
11.9 The most important factor to show that no enterprise enjoys a “Dominant Position”<br />
in the relevant market is to consider whether there is a barrier to new entrants on<br />
account of the alleged “Dominant Position” of the enterprise. Where several new<br />
entrants have in fact entered the market and as a new entrant IREO has captured the<br />
largest share of the market, there can be no case whatsoever for alleging any developer<br />
as enjoying a “Dominant Position”. This important aspect which has been considered<br />
in the JLL and Genesis reports has been totally ignored by QuBREX.<br />
11.10 It was argued that reference has been made to certain statements made in the<br />
Annual Reports, draft red herring prospectus and speech of the Chairman of DLF,<br />
etc. on the basis of which it is alleged that DLF had admitted that it enjoyed a<br />
“Dominant Position” and that, on the basis of these admissions it should be held<br />
that DLF enjoyed “Dominant Position” within the meaning of explanation (a) to<br />
Section 4 of the Act. In support of this argument reference was made to Clause (g) of<br />
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Section 19(4) of the Act, which provides that one of the factors for determining the<br />
“Dominant Position” under explanation (a) to Section 4 is that the enterprise has<br />
acquired a “Dominant Position” “otherwise”.<br />
11.11 It is significant that a special meaning is assigned to the term “Dominant<br />
Position”, only for the purpose of Section 4, which is defined in explanation (a) to<br />
Section 4. This is so as the Explanation itself states that the definition set out therein,<br />
is only “for the purpose of this Section”. As such, unless the conditions specified<br />
under Explanation (a) to Section 4 are satisfied, the enterprise would not be treated<br />
as enjoying a “Dominant Position” so as to invoke Section 4. This definition does<br />
not apply to the term “Dominant Position” appearing in other parts of the Act. As<br />
such, the term “Dominant Position” as used in Clause (g) of Section 19(4) does not<br />
have the same meaning as in Section 4.<br />
11.12 The aforesaid statements allegedly admitting the “Dominant Position” of DLF<br />
cannot be considered as an admission of “Dominant Position” as defined in<br />
Explanation (a) to Section 4. In order to hold that an enterprise enjoys a “Dominant<br />
Position” within the meaning of Section 4, the conditions as set out in Explanation (a)<br />
to Section 4 must be satisfied.<br />
11.13 Moreover, “Dominant Position” within the meaning of Explanation (a) to<br />
Section 4 is to be determined specifically with reference to the “relevant market,”<br />
which in the present case is alleged to be luxury apartments in Gurgaon. The so<br />
called admission on the basis of which dominance is sought to be proved, relates to<br />
statements made in respect of the all India operations of DLF and not with reference<br />
to the aforesaid relevant market. Moreover, it cannot be said that these general<br />
statements relate to residential properties being the “relevant product market”.<br />
As such, on the basis of the alleged statements it cannot be said that DLF enjoys a<br />
position of strength in the “relevant market” of “High end luxury apartments in<br />
Gurgaon”.<br />
11.14 Oral arguments were made in continuation of the submission dated<br />
6 th April, 2011 regarding jurisdictional objection. It was, inter alia, contended that<br />
there is a distinction between the transaction of sale of an apartment, wherein as per<br />
the agreement for sale/purchase of apartment, the right, title and interest in the<br />
apartment is transferred only after the completion of construction and obtaining<br />
occupation certificate. Till then, the ownership and title in the property is retained<br />
by DLF. The construction is not done for and on behalf of the Allottee, but for DLF<br />
itself. Even if the agreement for sale/purchase of the apartment is executed prior to<br />
or during construction, the title and ownership of the property is retained by DLF.<br />
In such a case there is no “Service” rendered.<br />
11.15 The distinction between an agreement for “sale apartment” and for rendering<br />
“service” is clearly brought out by case law. Reference may be made to one such<br />
judgment of the Gauhati High Court in the case of Magus Constructions Pvt. Ltd. v.<br />
UOI 8 (200*) 15 VST 17. It was argued that the facts of the present case are identical to<br />
the facts dealt within the above judgment.<br />
11.16 In order to contend that certain conditions of the contract were unfair, reliance<br />
was placed by the informant on the decision in the case of Central Inland Water<br />
Transport Corporation Ltd. and Anr. v. Brojo Nath Ganguli and Anr. (1986) 3 SCC 15.<br />
8 Ed.: MANU/GH/0115/2008: (2008) 217 CTR (Gau) 442: (2009) 3 GLR 514: 2008 (11)<br />
GLT 225: 2009 (3) GLT 161: [2008] 14STJ401 (Gauhati): (2009) 11Vat Reporter 46<br />
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11.17 The said decision related to imposition of a condition by a Rule in respect of<br />
the terms relating to termination of services of an employee. The principles laid<br />
down in the aforesaid case has no relevance to the present case which relates to an<br />
agreement between two private parties in a commercial transaction.<br />
11.18 The aforesaid decision was considered by the Delhi High Court in the case of<br />
Classic Motors Ltd. v. Maruti Udyog Ltd. MANU/DE/0586/1996: 65 (1997) DLT 166).<br />
The aforesaid decision of the Delhi High Court distinguished the decision in the<br />
case of Central Inland Water v. Brojo Nath Ganguli and after dealing with the relevant<br />
principles applicable to commercial contracts between private parties upheld the<br />
agreement.<br />
11.19 The same principles in relation to a commercial contract between private<br />
parties are also laid down by the Delhi High Court in the case of M/s. Unikol Bottlers<br />
Ltd. v. M/s. Dhillon Kool Drinks and Anr. (MANU/DE/0008/1995: 1994 28 DRJ 483).<br />
In Para 31, it is held that when a plea of duress/ coercion and unequal bargaining<br />
power is raised, the question of “free will” arises. In such cases, it is significant to<br />
consider the following factors:<br />
(i) Did the Plaintiff protest before or soon after the agreement?<br />
(ii) Did the Plaintiff take any steps to avoid the contract?<br />
(iii) Did the Plaintiff have any alternative course of action or remedy? If so, did the<br />
Plaintiff pursue or attempt to pursue the same?<br />
(iv) Did the Plaintiff convey benefit of independent advise?<br />
11.20 Applying the above principle, it may be seen that in the present case the<br />
agreements were executed in the year 2007, containing the terms and conditions, in<br />
respect of which objections are now sought to be taken by “Information” filed in<br />
May 2010. If such a contract could be considered as a contract of coercion, containing<br />
unfair terms, it was open to the Allottees to challenge the agreement soon after they<br />
were executed. However, the Allottees advisedly continued with the agreement since<br />
they were aware that the value of the apartment would appreciably increase,<br />
notwithstanding the conditions of the agreement which are now sought to be termed<br />
as “unfair”. The Plaintiff could challenge the validity of the agreement on the same<br />
grounds in a Court of law, but chose not to do so. This alternative course of action or<br />
remedy was not taken and no attempt was made in that behalf. The Allottees are<br />
well placed persons with adequate means who could invest amounts in excess of<br />
Rs. 1.5 to 2.5 crores. Some Allottees have booked more than one apartment and one<br />
such Allottee has booked seven apartments. Such Allottees had benefit of independent<br />
advise, but chose not to contest the agreement keeping in view the likely high<br />
appreciation in value. It is evident that on account of the unforeseen recession in<br />
2008-09 that some of the Allottees faced difficulty in making timely payment and<br />
committed default, resulting in cancellation of the agreement. In these circumstances,<br />
after a lapse of about 2½ to 3 years, attempt is being made to challenge the agreement.<br />
It is also significant that a large majority of Allottees have not contested the agreements<br />
and are satisfied with the appreciation in value, which is further likely to increase<br />
in due course. These factors are important to consider the objections relating to such<br />
agreements so belatedly.<br />
11.21 In respect of agreements executed long before the enforcement on Section 4, it<br />
cannot be said that the conditions contained therein were “imposed” by “abuse of<br />
dominant position,” prior to 20 th May, 2009. In the alternative and without prejudice<br />
to the aforesaid jurisdictional objection, it is submitted that even if Section 4 is sought<br />
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to be applied on the ground that the agreements executed in 2007 continue to be in<br />
force after 20 th May, 2009, only such conditions can be looked into, if at all, on the<br />
basis of which action is taken after 20 th May, 2009. Conditions like increase in the<br />
number of floors are already acted upon earlier. The objections regarding approval,<br />
etc. also relate to prior period. The defaults in making payments by defaulting<br />
Allottees have also taken place earlier. The structure of the building having been<br />
completed earlier, objections relating to change into specification for construction<br />
can also not be considered. Various other objections which are now sought to be<br />
taken relate to the earlier period. Even though termination of agreement may have<br />
taken place subsequently, the ground for termination, i.e. defaults in payment, had<br />
already arisen earlier.<br />
11.22 Under these circumstances, in any event no action can be taken in respect of<br />
the agreements executed prior to 20 th May, 2009.<br />
11.23 No developer can be said to have a “Dominant Position” in terms of<br />
Explanation (a) to Section 4, unless his market share in the relevant market is<br />
established to be very high in the range of 50 per cent or above. In this context,<br />
Gottrup-Klim judgment of the European Court was referred to. No reliable proof is<br />
given to suggest high market share of DLF.<br />
11.24 The particulars placed on record show that about 85-90 per cent transactions<br />
for sale of apartments is done through brokers. When customers approach brokers,<br />
various alternative properties are offered to them and the brokers apprise the<br />
customers of the pros and cons of the respective investments. Moreover, the customers<br />
also approach more than one broker to obtain information for proposed investment.<br />
As such, the customers obtain adequate information and knowledge before making<br />
investments. In these circumstances, the customer is not affected by any alleged<br />
position of strength enjoyed by a developer, in its favour, in the relevant market. The<br />
customers have ample choice of apartments offered by respective developers and<br />
the competition is intense.<br />
11.25 For determining market share, apart from the primary market, it is important<br />
to consider “substitutable properties” like resales in the secondary market and other<br />
properties. This would substantially bring down the market share of DLF to less<br />
than half of what has been determined in JLL and Genesis Reports.<br />
11.26 In the DG’s report it is admitted at Pages 67 and 74 that no data of sales figures<br />
in the relevant market is available in public domain. This is also stated in JLL Report<br />
as well as in the report of Genesis. This position is also affirmed in the report of<br />
QuBREX filed by the Informant. Since, QuBREX had no sales data, the figures of<br />
cumulative value of all the completed apartments for the entire past period are taken<br />
at the value of March 2011. The fallacy in the methodology adopted by QuBBREX is<br />
already pointed out. The fallacy in the methodology adopted by DG in determining<br />
the market share for Gurgaon is already set out in the written submissions. In the<br />
absence of any reliable proof of high market share of DLF, there can be no finding of<br />
“Dominant Position” within the meaning of Explanation (a) to Section 4.<br />
11.27 In the absence of sales figures, the alternative method adopted in JLL reports<br />
and the Genesis report, relating to “apartments offered” to the customers (active<br />
stock) clearly show that DLF’s market share was low and there were other developers<br />
whose marker share was higher. Further, there were several developers having<br />
market share in similar range as DLF. There was no barrier to new entrants. Even<br />
new entrants like IREO ad acquired a market share higher than DLF.<br />
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11.28 Further, there was intense competition in the relevant market and there were a<br />
large number of properties offered by competitors in the relevant market.<br />
11.29 For these and other reasons already placed on record, DLF cannot be said to<br />
have a “Dominant Position” in the relevant market as per Explanation (a) to<br />
Section 4.<br />
11.30 DLF submitted its response dated 11 th May, 2011 regarding land stock available<br />
with DLF in Gurgaon in terms of direction of the Commission dated 24 th March, 2011.<br />
The gist of submission of DLF is as under.<br />
11.31 Information regarding the area of land stock of DLF in Gurgaon is of no<br />
relevance unless the information regarding land stock of other developers in<br />
Gurgaon is also obtained and made available. In the absence of the information<br />
regarding the land stock in Gurgaon of other competing developers, no comparison<br />
can be made to determine the alleged dominant position of any particular enterprise.<br />
It may however be stated that the land stock of DLF in Gurgaon is insignificant<br />
considering the total land stock covered by the master plan of Gurgaon. It submitted<br />
that the total area of land covered by the Gurgaon Master Plan excluding town and<br />
village Abadi is about 36,000 hectares, i.e. 8,93,000 acres. Out of the above land the<br />
total land already developed as noted in the master plan is about 9,000 hectares,<br />
i.e. 24,400 acres. As such, the balance land is approximately 26,300 hectares,<br />
i.e. 64,900 acres. Out of the available land, certain areas are earmarked for transport,<br />
public utilities, open spaces and defence land, etc. The total land under these<br />
categories which is not developable is 8,000 hectares, i.e. 19,900 acres. As such after<br />
excluding above area the balance developable area under the Gurgaon master plan<br />
is 18,200 hectares, i.e. 45,000 acres. As the land stock held by the DLF is<br />
about 1,650 acres, DLF constitutes only about 3.67 per cent of the developable land<br />
in Gurgaon as per the Master Plan.<br />
11.32 DLF also filed its response dated 3 rd June, 2011 to the compilation of documents<br />
filed by the Informant on 19 th May, 2011 and also further response to the report of<br />
QuBREX filed by the Informant.<br />
12. Issues<br />
12.1 The Commission has given due consideration to the allegations made in the<br />
Information dated 6 th June, 2010, the investigation report of the DG dated<br />
13 th October, 2010, all the written and oral submissions made by the parties<br />
concerned along with opinions and analysis of experts relied upon by the<br />
Informant and the OPs. The relevant material available on record and the facts<br />
and circumstances of the case throw up the following issues for determination in<br />
this case:<br />
Issue 1: Do the provisions of Competition Act, 2002 apply to the facts and<br />
circumstances of the instant case?<br />
Issue 2: What is the relevant market, in the context of Section 4 read with<br />
Section 2(r), Section 19(5), Section 19(6) and Section 19(7) of the Competition Act,<br />
2002?<br />
Issue 3: Is DLF Ltd. dominant in the above relevant market, in the context of<br />
Section 4 read with Section 19(4) of the Competition Act?<br />
Issue 4: In case DLF Ltd. is found to be dominant, is there any abuse of its dominant<br />
position in the relevant market by the above party?<br />
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Issue 1 – Do the provisions of Competition Act, 2002 apply to the facts and<br />
circumstances of the instant case?<br />
12.2 It has been contended by the DLF that as “sale of an apartment” can neither be<br />
termed as sale of goods nor sale of service, Section 4(2)(a)(ii) is not relevant and<br />
applicable in the present case because it can be invoked only when there is purchase<br />
or sale of either goods or service. In support of this contention reliance has been<br />
placed by DLF on the Judgment of Hon’ble Supreme Court in Bangalore Development<br />
Authority v. Syndicate Bank (2007) 6 SCC 711 in Para 20.<br />
12.3 It has also been contended by the DLF that the terms and conditions of the<br />
agreement mentioned in the information related to agreements executed in December<br />
2006/2007. None of the impugned conditions can be said to have been imposed<br />
after 20 th May, 2009 when Section 4 came into force. Therefore, it cannot be held that<br />
any condition which was agreed to earlier is imposed by the DLF after 20 th May, 2009,<br />
so as to attract Section 4 of the Act. It has been further contended that the action of<br />
DLF in cancelling the allotment in pursuance of the terms and conditions of a validly<br />
executed and binding agreement on account of defaults committed prior to<br />
20 th May, 2009 cannot be examined under Section 4 of the Act.<br />
12.4 It has been also urged that prior to 20 th May, 2009, there was no legally recognised<br />
concept of an enterprise having a dominant position. Therefore, the dominance of<br />
an enterprise can be seen only on or after 20 th May, 2009 in terms of Section 4 of the<br />
Act and it is only thereafter, the question of contravention of Section 4 would arise,<br />
if any unfair or discriminatory condition is imposed.<br />
12.5 DLF has also taken a stand that the alleged conditions which have been taken<br />
as abusive are in fact usual conditions included in the agreements in accordance<br />
with “industry practice” and therefore, it cannot be said that such conditions are<br />
imposed by abuse of dominant position. Further, since the impugned Clauses of the<br />
agreement are adopted by other competitors also it became necessary for the DLF to<br />
incorporate such Clauses in order to meet competition and remain competitive.<br />
On the basis of this contention it has been submitted that such practice is exempted<br />
under the explanation to Section 4(2)(a) of the Act.<br />
12.6 In Bhim Sen v. Delhi Development Authority MANU/MR/0012/2003 while dealing<br />
with the allegation of unfair trade practice on part of DDA, the MRTP Commission held<br />
that a misrepresentation or false representation to the Complainant that a flat would be<br />
allotted to him followed by failure to offer the allotment was a failure on the part of DDA<br />
that was tantamount to deficiency in service. It was also held that the definition of<br />
service under Section 2(r) of the MRTP Act envisages dealings in real estate.<br />
12.7 Similarly, in Jaina Properties Pvt. Ltd. MANU/MR/0003/1991, the Jaina<br />
Properties issued an advertisement to the effect that shops of an area of 16 sq. ft.<br />
were available for Rs. 32,800 but later on the area of shop was enhanced from 16 sq.<br />
ft. to 23 sq. ft. and Complainant was required to pay Rs. 15,000 more for the extra<br />
space. The allegation of the Complainant was that in spite of his paying full amount<br />
he was allotted a space measuring 12 sq. ft. only. The Jaina Properties raised a<br />
preliminary objection that MRTP Act does not extend to matters involving immovable<br />
property as the company does not render any service within the meaning of MRTP<br />
Act. That contention was rejected by the MRTP Commission in view of the<br />
explanation added in Section 2(r) of the MRTP Act which declared that any dealings<br />
in real estate shall be included and shall be deemed always to have been included<br />
within the definition of service.<br />
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12.8 In a catena of cases, the Supreme Court has time and again held that housing<br />
activities undertaken by development authorities are service and are covered within<br />
the definition of service given in Section 2(o) of the Consumer Protection Act. It has<br />
been further held that the purchaser of flats or houses or plots are covered under the<br />
definition of consumer.<br />
12.9 In Lucknow Development Authority v. M.K. Gupta MANU/SC/0178/1994 the<br />
Apex Court while dealing with the issue whether Statutory Authorities such as<br />
Lucknow Development Authority or Delhi Development Authority or Bangalore<br />
Development Authority are amenable to Consumer Protection Act, 1986 for any act<br />
or omission relating to housing activity such as delay in delivery of possession of<br />
the houses to the Allottees, non-completion of the flats within the stipulated time, or<br />
defective or faulty construction, etc. also elaborately and succinctly construed the<br />
meaning of “service” and “consumer” as provided in the Consumer Protection Act.<br />
12.10 The Supreme Court negated the contention raised on behalf of development<br />
authorities that the housing activities undertaken by them are not covered under the<br />
ambit of term “service’. The Supreme Court emphatically held that:<br />
Construction of a house or flat is for the benefit of person for whom it is constructed.<br />
He may do it himself or hire services of a builder or a contractor. The latter being<br />
for consideration is service as defined in the Act. Similarly, when a Statutory<br />
Authority develops land or allots a site or constructs a house for the benefit of<br />
common man it is as much service as by a builder or a contractor. The one is<br />
contractual service and other is statutory service. If the service is defective or it is<br />
not what was represented then it would be unfair trade practice as defined in the<br />
Act. Any defect in construction activity would be denial of comfort and service to<br />
a consumer. When possession of property is not delivered within stipulated<br />
period the delay so caused is denial of service. Such disputes or claims are not in<br />
respect of Immovable property as argued but deficiency in rendering of service of<br />
particular standard, quality or grade.<br />
12.11 The Apex Court further held that a person who applies for a allotment of a<br />
building site or for a flat constructed by a development authority or enters into an<br />
agreement with a builder or a contractor is a potential user and nature of transaction<br />
is covered under the definition of “service of any description”. Housing activity is a<br />
service covered in the definition of term “service”.<br />
12.12 The case law cited by the DLF has not overruled the decision of the Apex Court<br />
in M.K. Gupta case (supra) and on the other hand the ratio propounded by the<br />
Supreme Court in the above case was followed by the Supreme Court in Chandigarh<br />
Housing Board v. Avtar Singh and Ors. MANU/SC/0749/2010.<br />
12.13 The rationale given be the Supreme Court in the above referred cases applies<br />
with full force in the present matter, more so when considering the fact that the<br />
definitions of “consumer” given in Section 2(f) and “service” in Section 2(u) of the<br />
Competition Act, 2002 are wider than the definition of these terms provided in the<br />
Consumer Protection Act, 1986. It is thus seen that dealings in real estate or housing<br />
construction has always been taken as service whether, it be MRTP Act or Consumer<br />
Protection Act or Finance Act.<br />
12.14 Even without taking the support of the decisions of Supreme Court in the<br />
cases referred above, a plain reading of Section 2(u) of the Act makes it abundantly<br />
clear that the activities of DLF in context of the present matter squarely fall within<br />
the ambit of term “service”. The relevant Clause (u) reads as under:<br />
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service means service of any description which is made available to potential<br />
users and includes the provision of services in connection with business of any<br />
industrial or commercial matters such as banking, communication, education,<br />
financing, insurance, chit funds, real estate, transport, storage, material treatment,<br />
processing, supply of electrical or other energy, boarding, lodging, entertainment,<br />
amusement, construction, repair, conveying of news or information and<br />
advertising.<br />
12.15 It is clear that the meaning of “service” as envisaged under the Act is of very<br />
wide magnitude and is not exhaustive in application. It is not disputed that DLF<br />
undertakes to construct apartment intended for sale to the potential consumers after<br />
developing the land. Therefore, it is explicit that this kind of activity is a provision of<br />
service in connection with business of commercial matters such as real estate or<br />
construction. Hence, the contention raised on behalf of the DLF that sale of an<br />
apartment is not covered under the definition of service is wholly misplaced and is<br />
devoid of any substance.<br />
12.16 The other contention of the DLF that since the apartment buyers” agreements<br />
were executed before Section 4 of the Act came into force, i.e. on 20 th May, 2009,<br />
therefore, its provisions were not attracted in the present matter has also no merit<br />
and deserves to be rejected. Though it is true that all acts done in pursuance of any<br />
agreement executed before the Section 4 of the Act came into being cannot be<br />
examined after the date of enforcement but if any enterprise invokes the provisions<br />
of such agreement after the date of enforcement and that action is now prohibited by<br />
the Act then that action could certainly be seen through the lens of Competition Act.<br />
12.17 In the present case the agreements, although entered between DLF and the<br />
Allottees before 20 th May, 2009 when Section 4 of the Act came into being, remained<br />
in operation even after the said date and DLF proceeded with the cancellation of<br />
various allotments under the Clauses of the agreement. Therefore, if the DLF acts<br />
under the Clauses of the agreement, which are now prohibited by the Act, such<br />
action can certainly be examined under the relevant provisions of the Act.<br />
12.18 This position has been clarified by the Bombay High Court in the case of<br />
Kingfisher Airline Ltd. and Anr. v. CCI and Ors. It has been held that:<br />
The question here is whether this agreement, which was valid until coming into<br />
force of the Act, would continue to be so valid even after the operation of the law.<br />
The parties as on today certainly propose to act upon that agreement. All acts<br />
done in pursuance of the agreement before the Act came into force would be valid<br />
and cannot be questioned. But if the parties went to perform certain things in<br />
pursuance of the agreement, which are now prohibited by law, would certainly<br />
be an illegality and such an agreement by its nature, therefore, would, from that<br />
time, be opposed to the public policy. We would say that the Act could have been<br />
treated as operating retrospectively, had the act rendered the agreement void ab<br />
initio and would render anything done pursuant to it as invalid. The Act does not<br />
say so. It is because the parties still want to act upon the agreement even after<br />
coming into force of the Act that difficulty arises. If the parties treat the agreement<br />
as still continuing and subsisting even after coming into force of the Act, which<br />
prohibits an agreement of such nature, such an agreement cannot be said to be<br />
valid from the date of the coming into force of the Act. If the law cannot be applied<br />
to the existing agreement, the very purpose of the implementation of the public<br />
policy would be defeated. Any and every person may set up an agreement said to<br />
be entered into prior to the coming into force of the Act and then claim immunity<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
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i<br />
2011]<br />
Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0299<br />
from the application of the Act, such thing would be absurd, illogical and illegal.<br />
The moment the Act comes into force, it brings into its sweep all existing<br />
agreements.<br />
12.19 In view of this decision, it is clear that the Act applies to all the existing<br />
agreements and covers those also which though entered into prior to the coming<br />
into force of Section 4 but sought to be acted upon now. In addition to that, in the<br />
present matter, the documents filed by the informant show that indeed in some<br />
cases the agreement was entered into between DLF and the Allottees after the date of<br />
commencement of Section 4 of the Act.<br />
12.20 The contention of the DLF that the impugned Clauses existing in the agreement<br />
entered between DLF and the Allottees are usual conditions as per industry practice<br />
and they cannot be termed abuse is liable to be rejected because in terms of the<br />
Section 4 the responsibility of the dominant player has been made more onerous<br />
and if such practices are also adopted by a non-dominant player it may not fall<br />
within the ambit of Section 4. On same ground the contention that DLF has<br />
incorporated impugned conditions to meet the competition is also not acceptable.<br />
Issue 2<br />
What is the relevant market, in the context of Section 4 read with Section 2(r),<br />
Section 19(5), Section 19(6) and Section 19(7) of the Competition Act, 2002?<br />
12.21 A “relevant market” is delineated on the basis of a distinct product or service<br />
market and a distinct geographic market. These terms have been defined in Section 2(r)<br />
of the Act read with Sub-sections (s) and (t) of Section 2. Furthermore, while examining<br />
facts of a particular case, the Commission must give due regard to all or any factors<br />
mentioned in Section 19(6) with respect to “relevant geographic market” and<br />
Section 19(7) with respect to “relevant product market”. The Commission has,<br />
therefore, kept the above provisions of the Act in mind in the ensuing discussion on<br />
delineation of the relevant market in this case.<br />
12.22 It is observed that the instant information involves dynamics in a market<br />
where the informant and the Opposite Parties are participants either in capacity of<br />
a consumer, a seller or as regulatory bodies that influence the market environment.<br />
The informant, Belaire Owner’s Association obviously represents the consumers in<br />
this market, while DLF Ltd. is selling or supplying some product or service.<br />
12.23 Haryana Urban Development Authority (HUDA) is a Statutory Authority and<br />
Department of Town and Country Planning (DTCP), State of Haryana is a government<br />
department, both of which provide the regulatory or policy environment in the<br />
market under consideration.<br />
12.24 It has been established earlier that DLF Ltd. is providing services of a developer/<br />
builder within the meaning of “service” given under Section 2(u) of the Act.<br />
Consequently, the informant is the “consumer” of this service, within the definition<br />
given under Section 2(f). The next point to be determined is whether these services,<br />
provided by DLF Ltd. to the informant, are of a distinct nature “by reason of<br />
characteristics...their prices and intended use” as stipulated in Section 2(t) of the Act.<br />
While examining the characteristics, this Commission also relies on factors of<br />
determination given in Section 19(7), such as end-use, price and consumer preferences.<br />
12.25 The Commission notes that the DG, in his report has described the nature of<br />
service being provided by DLF Ltd. in the context of the instant case as services of<br />
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developer/builder in respect of “high-end” residential building in Gurgaon. Thus,<br />
there are two important components of service definition made by the DG with<br />
regard to characteristics of the underlying physical asset that require interpretation,<br />
viz. “high-end” and “residential”. The third component, viz. “Gurgaon” relates to<br />
“geographic market” and shall be discussed at an appropriate place later.<br />
12.26 Broadly speaking, services of development or building can be provided in<br />
relation to residential properties and nonresidential properties. “Non-residential”<br />
properties may include a wide array of properties such as office space, retail shops,<br />
commercial space, hotels, storage space, industrial space, infrastructure, sports or<br />
amusement spaces, etc. Residential properties are buildings where people live, such<br />
as stand-alone houses, builder-floors, apartments, row-houses, condominiums or<br />
studio-apartments. Despite some element of consumer preferences, these categories<br />
may be interchangeable or substitutable to some extent, within a certain price range.<br />
Therefore, the most important determinant is the price of the dwelling unit within a<br />
specific geographical area. It is in this context that it becomes important to ascertain<br />
whether a “high-end” residential unit constitutes a distinct category.<br />
12.27 Terms like “high-end” or “affordable” are relatively subjective and would<br />
need to be determined in any case. At the same time, it can be safely concluded that<br />
a palace cannot be a substitute for a studio apartment or even a row-house and vice<br />
versa. Therefore, in this case, it is felt necessary to establish a clear and logical<br />
interpretation of the term “high-end”.<br />
12.28 Relying on the JLLS report DLF Ltd. has raised a question mark on the term<br />
“high-end” used by the DG and argued:<br />
There is no justification or basis and no evidence is placed on record to show that<br />
an apartment having a value of Rs. 2 - 2.5 crores would be relevant to determine<br />
a category to be described as Gurgaon (high-end)... There is no such criteria or<br />
bench mark. The said JLLS report further states, “While some claim luxury on the<br />
basis of size of apartments, other claim it on basis of location or even as a<br />
marketing aid”.<br />
12.29 This Commission agrees that there can be no hard and fast criteria for<br />
determining concepts like “luxury” or “high-end” but believes that just because no<br />
specific distinguishing criteria exist, it does not mean that there is no distinction<br />
between “high-end” and “economy” or “low-end” residential units. This distinction<br />
has to be made in the context of facts of a case. Further, “high-end” is not a function<br />
of size alone. It is a complex mix of factors such as size, reputation of the location,<br />
characteristics of neighbours, quality of construction, etc. that go into considering a<br />
dwelling unit as “high-end” or otherwise. However, the most significant<br />
characteristic of a “high-end” has to be the characteristics of its actual customers<br />
and amongst all objective differentiators of a customer’s characteristics is his or her<br />
capacity to pay because in economics, demand is desire backed by the ability to pay.<br />
12.30 Residential accommodation for Lower Income Group (LIG), Middle Income<br />
Group (MIG) and Higher Income Group (HIG) are standard descriptions adopted<br />
by several public sector builders such as Delhi Development Authority (DDA),<br />
Ghaziabad Development Authority (GDA), etc. Apart from the physical attributes,<br />
these categorisations also take into account the income or expenditure levels of the<br />
customer base. Together, these factors create a distinctly identifiable residential unit<br />
that is not substitutable in an economic sense. In other words, a small but significant<br />
non-transitional increase in price of a unit in one category [termed SSNIP test often<br />
applied in abuse of dominance cases] would not make the customer shift to another<br />
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b<br />
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e<br />
f<br />
g<br />
h<br />
i<br />
2011]<br />
Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)<br />
0301<br />
category. A 5 per cent increase in the price of a villa would not make the intending<br />
customer choose a multi-storey apartment. The purchase may be deferred briefly or<br />
the choice may shift to a slightly less comfortable villa but a person who has made a<br />
final consumer choice of preferring a villa for the reasons of family size, need for<br />
privacy, demonstration effect, etc. would not switch to an apartment for a small<br />
increase in price.<br />
12.31 It is a well accepted fact that residential accommodation constructed by public<br />
sector builders like DDA, GDA, etc. is neither meant to be, nor is treated as a<br />
“high end” or “luxury” accommodation. This fact is in keeping with the charter<br />
and mandate of such authorities. Users/buyers of “high-end” accommodation<br />
demand quality and ambience of a distinctly higher level, and are willing to pay<br />
significantly higher prices to meet their requirements. Taking into account the current<br />
prices of HIG accommodation provided by these development authorities, as also<br />
the “demands and paying capacity of the growing upper middle and rich classes in<br />
the society, from the cost perspective it is quite logical to accept an apartment costing<br />
Rs. 2-2.5 crores (20-25 million) as “high-end” in the Indian socio-economic reality.<br />
If “luxury” is something that the majority of population cannot afford, then<br />
apartments like Belaire are “high-end” apartments. Residential units that do not<br />
have similar attributes will not be substitutes because the buyers are looking for<br />
“luxury” and not just a roof on their heads. That is why they are willing to pay a<br />
high-end price.<br />
12.32 Coming to the features of properties such as DLF’s Belaire, it is noted that the<br />
promotional brochures of the property talked about innumerable additional facilities,<br />
like, schools, shops and commercial spaces within the complex, club, dispensary,<br />
health centre, sports and recreational facilities,, etc. There is ample information in<br />
public domain in terms of newspaper ads, websites of property dealers, etc. that<br />
indicate that such an array of facilities is not a common feature for residential<br />
properties in general. These features, along with the cost-range mentioned earlier,<br />
may be broadly considered to define the characteristics of “high-end” residential<br />
accommodation.<br />
12.33 This Commission has given due consideration to the JLLS and GENESIS<br />
reports submitted by DLF Ltd. and to the QuBREX report submitted by the informant.<br />
The former two suggested taking Rs. 4000 per square feet as the floor price for<br />
“luxury” apartments whereas, the latter favoured Rs. 7,000 per square feet. We do<br />
not think any such quantification is necessary, particularly when DLF itself<br />
advertised the said apartments as “Luxury Homes at DLF Golf Links”.<br />
12.34 An attempt has been made to raise a point of distinction between a purchase<br />
for “own residence” as against for “investment”. We find that such a distinction is<br />
not applicable in the present case.<br />
A working person may buy a residence with a view to “invest” in a property that<br />
would give him or her good returns for purchasing a property post retirement at<br />
some other place. On the other hand, circumstances may force a person to move into<br />
a property originally intended as just an “investment”. Similarly, a person may<br />
“invest” in a property to be used as residence by his or her children. The decision to<br />
purchase a residential property is always from the point of view of a resident -<br />
regardless of whether the person immediately or actually lives in it. Therefore, the<br />
demand for a “high-end” or “luxury” apartment would be based on the same set of<br />
criteria and backed by the same ability and willingness to pay, whether it is being<br />
purchased for self-residence or for “investment”.<br />
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12.35 Similarly, the argument that apartments are also sold by initial Allottees<br />
and that there is a thriving “secondary” market, also does not carry weight in<br />
the relevant market under consideration. Every asset, including real estate, has<br />
a value which either erodes or appreciates with time. Depending upon the<br />
preference and the circumstances, the owner may like to retain it or dispose of at<br />
an opportune time. While “secondary market” may have some bearing on the<br />
demand and supply variables, it certainly cannot form a part of the relevant<br />
market for the simple reason that the primary market is a market for “service”<br />
while the secondary market is a market for immoveable property. Moreover, while<br />
building an apartment, a builder performs numerous development activities like<br />
landscaping, providing common facilities, apart from obtaining statutory licenses<br />
while a sale in secondary market merely transfers the ownership rights. An<br />
individual who is selling an apartment he or she has purchased cannot be<br />
considered as a competitor of DLF Ltd. or any other builder/developer. Nor is he<br />
or she providing the service of building/developing. The dynamics of such sale<br />
or purchase are completely different from those existing in the relevant market<br />
under consideration. The value added or the value reduced due to usage or<br />
otherwise does not even leave the apartment as the same one as had been built or<br />
developed by the builder/developer. Therefore, this argument also deserves to<br />
be rejected.<br />
12.36 Having settled the question on categorisation of “high-end” residential<br />
buildings, we would now examine the relevant geographic market. In terms of<br />
Section 2(s) of the Act, “condition of competition” for the services provided by<br />
competitors should be “distinctly homogeneous and can be distinguished from the<br />
conditions prevailing in neighbouring areas”. The Commission also takes into<br />
consideration factors such as local specification requirements and consumer<br />
preferences given as determining factors in Section 19(6) of the Act. Based on the<br />
facts of the case, Gurgaon is seen to be the relevant geographic market. A decision to<br />
purchase a high-end apartment in Gurgaon is not easily substitutable by a decision<br />
to purchase a similar apartment in any other geographical location. Gurgaon is<br />
known to posses certain unique geographical characteristics such as its proximity<br />
to Delhi, proximity to Airports and a distinct brand image as a destination for<br />
upwardly mobile families.<br />
12.37 The decision to take residence, however temporarily or permanently, depends<br />
on several factors such as occupation, children’s education or location, family,<br />
friends, surroundings, amenities, quality of life and affordability, amongst others.<br />
Since, a residential property is by nature immovable, its geographical location is<br />
amongst the foremost factors for consideration. A person working in Chennai,<br />
belonging to Tamil Nadu, with children living or studying in Chennai or aged<br />
parents living in a nearby village is most unlikely to even look at a property in<br />
Gurgaon in Haryana, let alone purchase it. Almost equally unlikely is for someone<br />
working in Greater NOIDA to buy a luxury apartment in Haryana if he or she never<br />
intends to settle there. There are sufficient “investment” opportunities available in<br />
Greater NOIDA of similar apartments.<br />
12.38 In the end, the “investment” or “own residence” decision centres on locational<br />
preference of the purchaser and this preference is not interchangeable or substitutable.<br />
A better apartment for lesser price may be available in, say, Surat in Gujarat but that<br />
apartment would have no value for the average purchaser who has decided to buy<br />
a house in Gurgaon for whatever reason.<br />
a<br />
b<br />
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d<br />
e<br />
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b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
2011]<br />
Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0303<br />
12.39 In the instant case, we are not looking at concerns of speculators considering<br />
various places in the country in search of good deals that would be profitable, but of<br />
average citizens buying a residential property out of their hard earned money or by<br />
taking housing loans. A small, 5 per cent increase in the price of an apartment in<br />
Gurgaon would not make the person shift his preference to Ghaziabad, Bahadurgarh<br />
or Faridabad on the peripheries of Delhi or even to Delhi in a vast majority of cases.<br />
12.40 In conclusion, on this issue, this Commission is of the view that the relevant<br />
market is the market for services of developer/builder in respect of high-end<br />
residential accommodation in Gurgaon.<br />
Issue 3<br />
Is DLF Ltd. dominant in the above relevant market, in the context of Section 4 read<br />
with Section 19(4) of the Competition Act?<br />
12.41 Having delineated the relevant market above, it is now to be examined whether<br />
DLF Ltd. is in a “dominant position” in the relevant market in the context of Section 4<br />
read with Section 19(4) of the Act.<br />
12.42 The Explanation (a) to Section 4 very clearly defines “dominant position” as<br />
“a position of strength”. This strength should enable the enterprise to “operate<br />
independently of competitive forces prevailing in the relevant market” or to “affect<br />
its competitors or consumers or the relevant market in its favour.”<br />
12.43 The evaluation of this “strength” is to be done not merely on the basis of the<br />
market share of the enterprise in the relevant market but on the basis of a host of<br />
stipulated factors such as size and importance of competitors, economic power of<br />
the enterprise, entry barriers, etc. as mentioned in Section 19(4) of the Act. This wide<br />
spectrum of factors provided in the Section indicates that the Commission is required<br />
to take a very holistic and pragmatic approach while inquiring whether an enterprise<br />
enjoys a dominant position before arriving at a conclusion based upon such inquiry.<br />
It is conceivable that the “dominant position” may be acquired due to several factors<br />
even outside the “relevant market” but, “for the purpose of” Section 4, this “position<br />
of strength” must give the enterprise ability to operate independently of competitive<br />
forces” in the relevant market or ability to “affect its competitors or consumers or the<br />
relevant market in its favour”. Thus, strengths derived from even other markets, if<br />
they give an enterprise such abilities as mentioned above, would render the enterprise<br />
as “dominant” in the relevant market.<br />
12.44 It is important to understand each of the terms that together constitute the<br />
framework for determining dominant position. Therefore, first we look at the phrase,<br />
“operate independently of competitive forces prevailing in the relevant market”.<br />
12.45 Characteristic of a market is defined by the interplay of market forces of demand<br />
and supply, which in turn are affected by several forces including government<br />
policy or regulations, demographic factors and natural conditions of land<br />
availability, etc.<br />
12.46 The preamble of the Competition Act and Section 18 mandates the Commission<br />
to “protect the interest of consumers” and it is important to ensure that consumers”<br />
surplus is not adversely impacted. The competitive forces that a seller may face are<br />
challenges from existing competitors, entry of newer competitors, or from newer<br />
rival products. Healthy competition among the sellers promotes productive and<br />
allocative efficiencies and optimises consumer surplus. However, there is cause for<br />
concern when the measures taken by a seller include conscious actions intended to<br />
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create entry barriers, drive out existing rivals, control output or price, impose<br />
restrictive and supplementary obligations on captive consumers, impose unfair or<br />
discriminatory conditions or prices to the disadvantage of consumers or rival firms<br />
or leverage strengths in one market to enter or protect another market. To avoid the<br />
challenges from newer, more efficient and innovative products, sellers may also<br />
take measures to thwart technical or scientific development in a market. Such conduct<br />
is considered anti-competitive and comes under the scanner of competition laws.<br />
Therefore, for the purpose of Explanation (a)(i) to Section 4, it is important to examine<br />
the ability of an enterprise to operate independently of competitive forces generated<br />
by its rivals.<br />
12.47 Another aspect of dominance given in Explanation (a)(ii) to Section 4 relates<br />
to the ability of an enterprise to “affect its competitors or consumers or the relevant<br />
market in its favour.” For example, an enterprise may have the capability to not only<br />
operate independently of competitive forces but may actually be in a position to<br />
influence its competitors or consumers in the relevant market or the relevant market<br />
in its favour. In a sense, this is a higher degree of strength where an enterprise may<br />
be freely able to adopt price or non-price strategy to overcome downward pressures<br />
on its profit from its competitors, or to capture or bind consumers or to create a<br />
market environment that would deter newer competition, both in terms of competing<br />
enterprises or rival products.<br />
12.48 The facts of this case have been examined keeping in view the provisions<br />
relating to dominant position given in the Act. While doing so, the Commission has<br />
given due consideration to the findings of the DG and submissions made by the<br />
parties concerned including various reports relied upon by them such as analysis<br />
reports from Jones La Salle Meghraj (JLLM), ICICI Direct Analyst, RBS (The Royal<br />
Bank of Scotland) Analyst, Knight Frank, Goldman Sachs, Prop Equity and QuBREX.<br />
The essential assertions or contentions have been mentioned in great detail in these<br />
reports and hence are only briefly referred to in this Section of the order, where<br />
required.<br />
12.49 The facts that have emerged during the proceedings before the Commission<br />
have to be examined to ascertain whether DLF Limited has the position of strength<br />
in the relevant market in the light of the discussion on this concept in the previous<br />
paras. Each of the main contentions of the OP-1 is discussed below.<br />
12.50 The DLF Ltd. has firstly contended that there are many large real estate<br />
companies and builders in India, particularly in Northern India as well as in NCR<br />
and Gurgaon who offer stiff competition and give competitive offers in the relevant<br />
market of residential apartments to give a wide choice to the consumers. The<br />
Commission feels that the relevant point here is whether DLF Ltd. along with its<br />
subsidiaries has a position of strength in comparison to its competitors. The Act<br />
lays down factors for determining this position of strength under Section 19(4).<br />
These are discussed later in the order.<br />
12.51 OP-1 has argued that the market share determined by JLLM report based upon<br />
number of apartments as well as on the basis of the values thereof offered by the<br />
respective developers in NCR and Gurgaon is the correct basis for determining<br />
market share. OP-1 has also stated that sales figure of different developers is not<br />
available and also might not be relevant for determining the market share. Moreover,<br />
determination of market share for Gurgaon derived from market shares based on the<br />
all India sales figure is not appropriate. As regards factors other than the market<br />
share mentioned in Section 19(4) of the Competition Act, 2002, OP-1 has also<br />
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a<br />
b<br />
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d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
2011]<br />
Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0305<br />
contended they need not be discussed since the assumption that the market share of<br />
DLF is the highest itself has no basis and thereafter consideration of the further<br />
factors becomes irrelevant.<br />
12.52 Furthermore, it was contended that factors mentioned in Section 19(4) are<br />
only indicative and relevance of each factor has to be considered in the light of<br />
overall facts and market conditions in each case. Nevertheless, DLF Ltd. has<br />
contested several findings of the DG. With specific reference to Clauses (b) and (c) of<br />
Section 19(4), it was argued that its total size and turnover considered by the DG is<br />
based on figures that relates to commercial as well as retail business, which is<br />
admittedly larger. Moreover, the figures are not confined only to the aforesaid relevant<br />
market. With reference to Clause (f) of Section 19(4), it has been brought out by OP-1<br />
that it cannot be said that any customer is in any way dependent on it when he<br />
desires to purchase a residential property. With reference to the factor mentioned in<br />
Clause (h) of 19(4), it has been stated that during the period from 2007 onwards, a<br />
large number of new developers have entered the market to offer residential<br />
apartments including luxury apartments. Such new developers are also creating<br />
intense competition in the market and the old existing developers have to meet this<br />
intense competition. As regards, factor in Clause (j) of Section 19(4), it has been<br />
stated by OP-1 that the size of market, even for residential properties is very large in<br />
Northern India, NCR and even in Gurgaon. Further, Herfindahl Index indicated<br />
therein, shows that the market is less concentrated and in such a market there can be<br />
no case for monopoly or dominant position.<br />
12.53 In this context, the foremost and basic question is deciding whether the data<br />
and comments made in Jones La Salle Meghraj (JLLM) report and other market<br />
reports relied upon by DLF are more authentic/reliable than the CMIE and other<br />
market reports relied upon by the DG w.r.t. establishing market power (and hence<br />
dominance) of DLF. The biggest weakness of the data used by DLF is that it is based<br />
on current turnover and “active stock”. Active stock signifies current trading stock<br />
and reveals nothing about volumes already sold in recent past. There is nothing to<br />
indicate why DLF should be given more weightage over the objective and unbiased<br />
data used by DG. DLF Ltd. primarily relies on JLLM report that it commissioned<br />
while DG relies on CMIE data (and others) that are objective and taken from<br />
public domain. CMIE is an independent economic research and analysis<br />
organisation considerable part of whose database and analysis is available in public<br />
domain. CMIE data is extensively used by many corporate and some Government<br />
agencies for analytical purposes. The Commission is disinclined to accept the data<br />
of JLL. It is also noteworthy that despite being asked by the Commission, OP-1 did<br />
not submit sales data in relation to relevant market. Consequently, any claim that<br />
DLF Ltd. does not have a position of strength in terms of market share remained<br />
unsubstantiated.<br />
12.54 The Commission has considered the issues relating to market share, which is<br />
one of the important parameters for determining dominance. However, as is evident<br />
from the provisions of Section 19(4), it need not necessarily be the single predominant<br />
factor and often a host of other factors have to be considered. Further, if sufficient<br />
and undisputed data is not available to determine market share in a credible manner,<br />
it becomes even more important to draw on other corroborating data and analyse<br />
the other factors in even greater depth to off-set the difficulties in working out sharply<br />
specified market shares on account of data constraints, and/or to complement the<br />
market share when margins between competitors are not wide enough in determining<br />
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the strength of the enterprise in terms of affecting market forces as set out in the<br />
explanation (a) to Section 4.<br />
12.55 Within the above constraint, market share can be used as the initial starting<br />
point for establishing dominance of an enterprise. Two commonly used measures for<br />
defining market share in the real estate business are a) sales figures (value terms) and<br />
b) active stock (volume terms), although, both are sensitive to the quality of data. Data<br />
available in the public domain pertaining to this sector is constrained by limited<br />
coverage both in space and time dimensions. DG has used sales figures for measuring<br />
dominance while OP-1 prefers to rely on active stock. The Commission has given due<br />
consideration to the conclusions of the DG in this regard, the contentions of the OP-1<br />
regarding those findings as well as submissions of the informant on the contentions<br />
of OP-1. These have been mentioned in detail earlier in this order.<br />
12.56 Despite the data constraint, it may be appropriate to recollect the evidences of<br />
market power of DLF estimated by DG who has brought out that the market share<br />
calculated on the basis of data from CMIE applies to all companies operating all<br />
over India and the data establishes that OP-1 has the highest share (considerably<br />
higher than the nearest competitor) among all the housing construction companies<br />
in India. On basis of very rational and reasonable logic, the DG report shows that<br />
even after granting a margin of 5 per cent - 10 per cent on account of other, minor<br />
players not covered in CMIE data, data and sampling error, etc. the market share of<br />
OP-1 among the companies operating in Gurgaon exceeds 55 per cent. DG has<br />
analysed total sales figure of 82 companies from CMIE database, who are engaged<br />
in real estate residential business and who are not only operating in Gurgaon but<br />
also in other places in India. On basis of this analysis, the DG report establishes the<br />
superior market share of OP-1 at about 44 per cent. For the year 2009-10 also, DG<br />
has shown the market share of OP-1 in relevant market to be about 50 per cent.<br />
12.57 DG has also stated that it cannot be said that any other player enjoys similar<br />
or near to similar market share than that of OP-1. In their annual reports and various<br />
literature, OP-1 have repeatedly stated that Unitech is one of their close competitors,<br />
however, it is observed that the market share of OP-1 is more than double of the<br />
market share of Unitech, its nearest competitor, as on date. In conclusion, the DG<br />
has clearly shown that the market share of the nearest competitor is much less than<br />
OP-1, and, therefore, there is limited competitive constraint. In totality, it can be said<br />
that market share of OP-1 as determined by DG on basis of very detailed analysis is<br />
indicative of its dominance in the relevant market.<br />
12.58 On the other hand, DLF, citing JLL study using active stock concept as against<br />
sales figures from annual accounts, has preferred the use of the concept of active<br />
stock in a broader product and geographic market. The Commission has noted that<br />
the sales data used by DLF in this context is unauthenticated, and that DLF’s<br />
approach does not provide a robust alternative measure, which could enable the<br />
Commission to take this into account meaningfully for determination of the issue.<br />
12.59 In their response DLF have also argued that there are errors in the data collated<br />
by Centre for Monitoring Indian Economy (CMIE). They have contended that the<br />
CMIE data used by DG, in regard to sales figures suffers from certain deficiencies in<br />
terms of coverage and accuracy. The Commission finds that market shares worked<br />
out with reference to sales can be different, depending on whether the sales of a<br />
company are computed in volume terms or value terms. Further, the use of different<br />
systems of accounting could also lead to different results. These issues actually<br />
arise from the data limitations, which are inevitable in the real estate business, as<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)<br />
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there exist no official sectoral statistical estimates applicable for the entire country.<br />
In view of CMIE data being the most reliable available data, the Commission finds<br />
no reason to reject the analysis of DG regarding the dominant position of DLF Ltd.<br />
in the relevant market. Thus, in terms of Section 19(4)(a) Commission finds force in<br />
the conclusion of dominance arrived at by DG.<br />
12.60 The argument advanced by OP-1 that other factors of dominance given in<br />
Section 19(4) are only indicative is contrary to the legal position as seen from the<br />
provisions of the Act. Section 19(4) says in no ambiguous terms that “The Commission<br />
shall, while inquiring whether an enterprise enjoys a dominant position or not<br />
under Section 4, have due regard to all or any of the following factors...” Thus, it is<br />
clear that the Act does not envisage that market share alone should be considered by<br />
the Commission while determining dominant position of the enterprise. To do so<br />
would be to go against the wording and intent of the Act. In fact, a proper reading of<br />
Section 19(4) clearly show that the law makers intended to assess dominant position<br />
in a very holistic manner, by triangulating several aspects of the relevant market as<br />
well as of the overall wider market where an enterprise operates and comparing<br />
relative cumulative strengths and weaknesses of the players within the relevant<br />
market. At the same time, several other factors like overall economic development,<br />
social obligations and regulatory environment also need to be considered. Most<br />
importantly, Clause (m) of Section 19(4) also explicitly empowers the Commission<br />
to consider “any other factor” relevant for assessment of dominance. Therefore, to<br />
argue that only market share in the relevant market is a valid determinant of<br />
dominance is against the very spirit of the Act.<br />
12.61 It is important to note that to evaluate the relative position of strength in terms<br />
of the parameters of size and resources of the enterprise and size and importance of<br />
the competitors given under Section 19(4)(b) and (c) of the Act, it is not necessary to<br />
confine the evaluation only to the relevant market. Indeed, to do that would defeat<br />
the very purpose of these parameters. It is the overall size and resources of an<br />
enterprise or the overall importance of a competitor that has to be compared to see<br />
comparative position of strength and not the limited manifestation of that strength<br />
in a particular product or geographic market.<br />
12.62 In this context, it is noted that DLF Limited also has 82.7 per cent stake in DLF<br />
Home Developers Limited and 100 per cent stake in DLF New Gurgaon Home<br />
Developers Private Ltd. as per their annual report. While examining the dominant<br />
position of enterprise under Section 4, it is pertinent to refer to the definition of<br />
“enterprise” given in Section 2(h) of the Act wherein the activity of the enterprise in<br />
the relevant market includes direct or indirect activity through “one or more of its<br />
units or divisions or subsidiaries...” Similar assessment of combined strength is<br />
inferred from the use of the term “group” in Section 4.<br />
12.63 The investigation report analysed CMIE Data Base in respect of about 118 real<br />
estate companies across India and has found that DLF Ltd. group has about<br />
69 per cent of gross fixed assets and 45 per cent of capital employed. As per the draft<br />
Red Hearing Prospectus filed by DLF Ltd. In 2007, the group had a total land bank<br />
of 10,225 acres out of which 49 per cent was located in Gurgaon alone.<br />
12.64 The Forbes’ list of global 2,000 companies published for the year 2010 includes<br />
DLF Ltd. which is the only Indian real estate company to feature amongst the top 2000<br />
at a significant position of 923. Business Today in its May, 2009 issue ranked DLF Ltd.<br />
at 14 th position among top 100 companies of India and there was no other real estate<br />
company in the list.<br />
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12.65 In terms of income and profit after tax, also DLF has distinct advantage over<br />
other real estate players. DG after analyzing Net Income and PAT of 113 companies<br />
for 2008-09 has shown that OP-1 has about 41 per cent share as far as net income is<br />
concerned and about 78 per cent as far as PAT is concerned. In terms of market<br />
capitalisation, the investigation report has examined data in public domain which<br />
shows DLF Ltd. holds 23 rd position as against its nearest competitor in the relevant<br />
market viz. Unitech which holds 68 th position. A similar differential exists in terms<br />
of net income, Profit After Tax (PAT), gross fixed assets, cash profits, net worth and<br />
capital employed.<br />
12.66 The DG report shows, with the help of cogent reasoning and supporting data<br />
that if the position of OP-1 is compared with that of Unitech, its nearest competitor, it<br />
emerges as clear front runner in terms of sales, Net Income, PAT, Gross Fixed Assets<br />
and Capital Employed. Similarly, OP-1 also emerges leader when financial position<br />
of other big players like Emmar, Parshvanath and Omaxe group are compared.<br />
12.67 On the other hand, it has been submitted by OP-1 that in 2007, it has supplied<br />
projects worth 6.7 million sq. ft. as against 16.8 million sq. ft. by Unitech and<br />
10.7 million sq.ft.by Parshvanath. For the year ending March 2009, Parshvanath,<br />
one of the larger builders had a turnover of Rs. 762 crore and its stated land reserve<br />
is 4,224 acres. Unitech has a stated land reserve of 11,179 acre. Its turnover in the<br />
year ending March 2009 was Rs. 3,316 crore. The stated land reserve of Ansal API is<br />
9,335 acres and that of Omaxe is 4,500 acres. Further, as per RBS (The Royal Bank of<br />
Scotland) Analyst Report dated 18 th January, 2010, its land bank in NCR is stated to<br />
be 6.3 million sq. ft. These figures show that there are several competitors of a very<br />
large size and there are many more large size builders. As an argument, OP-1 has<br />
also stated that it has not launched any new project in the recent past and it has<br />
been stated that the residential space offered by OP-1 does not constitute any<br />
substantial portion of the total residential space offered by various developers.<br />
12.68 The Commission notes some incontrovertible facts that have been given in the<br />
investigation report of the DG. These have not been contradicted by the OP-1. These<br />
include facts such as OP-1 has more than 13,000 acres of prime land. As per draft<br />
herring prospectus filed by OP-1 Limited in the year 2007, the group had the total<br />
land bank of 10,225 acres. This far exceeds the land bank of Unitech, the nearest<br />
competitor of OP-1. The turnover of OP-1 for 2009 was Rs. 10,035.39 crores. This is<br />
almost 300 per cent higher than that of Unitech and nearly 700 per cent higher than<br />
that of Parshvanath. The “supply” of projects in a snapshot of a single year would<br />
give a completely erroneous picture of the comparative strengths of OP-1 and its<br />
competitors. A straight look at the undisputed comparative figures given here takes<br />
all the force out of the arguments of the OP-1.<br />
12.69 The report of the DG creates a very lucid picture of relative strengths of OP-1 as<br />
compared to its nearest competitors. The OP-1 has not brought on record any<br />
substantive fact that may besmirch that picture. Therefore, this Commission is of the<br />
view that DLF Ltd. has significant advantages over competitors in size and resources.<br />
Thus, the dominant position of the OP-1 in terms of Clauses (b) and (c) of Section 19(4)<br />
is amply established.<br />
12.70 In addition to the discussion above in respect of Clauses (a), (b) and (c) to<br />
Section 19(4) other relevant facts are also discussed below to arrive at the finding in<br />
respect of the position of strength of OP-1 in this case. These facts are relatable to<br />
factors given under Clauses (d) to (m) of Section 19(4).<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0309<br />
12.71 The investigation report states that DLF Ltd. has a clear early mover’s advantage<br />
since it has been in the business since 1946 and apart from residential sector; it has<br />
leadership position in commercial, retail and office space sectors. This position has<br />
been propagated by DLF itself and is evident from the wordings of the draft Red<br />
Hearing prospectus filed before SEBI and public statements of its Executive Chairman<br />
that, “DLF’s dominant position in Indian Homes segment is established...”<br />
12.72 DLF has developed more than 22 urban colonies spread across over 32 cities<br />
and has about 300 subsidiaries. These constitute a redoubtable sales net work and<br />
provide incomparable services of integrated township in Gurgaon with a wide<br />
array of commercial properties, retail space, recreation facilities, etc. This level of<br />
vertical integration of sale or service network has not been achieved by other<br />
competitors particularly in Gurgaon.<br />
12.73 A consumer looking for residential accommodation is influenced by several<br />
factors such as proximity of work place, schools, recreation centres, shopping centres,<br />
etc. Due to the high level of vertical integration of services in the integrated township<br />
of DLF in Gurgaon, there is very high dependence of consumers on DLF in that area.<br />
A person working in one of the offices situated within the DLF township or doing<br />
business from one of the commercial properties is bound to be heavily inclined to<br />
buying a residential property in the DLF township and would have more than<br />
normal resistance to shifting to another area outside township.<br />
12.74 Real estate is a high cost sector with natural entry barriers due to high cost of<br />
land and brand value of incumbent market leaders such as DLF.<br />
12.75 In a market such as the instant relevant market, the consumers have very little<br />
or no countervailing buying powers. There are few developers/builders of luxury,<br />
high-end apartments and thousands of prospective buyers. These conditions would<br />
ensure that consumers will be the price takers and would have little option but to<br />
accept any conditions that may be laid down by the seller. In such a market, any<br />
seller in a position of strength would have no need to sacrifice its producer’s surplus<br />
to meet competition. In fact, the market followers would find it advantageous to<br />
adopt similar price and non-price strategies as the market leader since in such a<br />
market the consumer does not possess much market power.<br />
12.76 As can be seen from the discussion above from every logical angle, DLF Ltd.<br />
and its subsidiaries have a considerably higher position of strength in the relevant<br />
market in comparison with its competitors due to several factors which have been<br />
elaborated upon. Its competitors may be large but do not compare to the strength of<br />
DLF. In context of the historical presence of DLF in the market, its superior level of<br />
vertical integration, its presence in nonresidential segment of real estate, its financial<br />
strength, etc., there can be no doubt that DLF Ltd. is way ahead of its competitors in<br />
terms of its ability to operate independently of competitive forces or affect its<br />
competitors or consumers or the relevant market in its favour.<br />
12.77 On the contrary, it can be seen that though over the past few years several new<br />
developers/builders have entered the relevant market, despite this development<br />
there has been little dilution of the position of strength of DLF Ltd. in the market. The<br />
fact that there has been no move to improve the framework of buyers’ agreement to<br />
make it more attractive to consumers, also supports this conclusion. DLF Ltd. is<br />
impervious to the level of competition currently being provided by other players and<br />
there is no perception of threat from any quarter. Under a more competitive scenario,<br />
where there are increased numbers of players capable of supplying equally good<br />
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rival products or services, the incumbent player would display a strong tendency to<br />
meet the competition and this would be reflected in improved customer interface,<br />
amongst other things. There is no evidence to show this has happened.<br />
12.78 The market structure in this case is such that there is low level of concentration.<br />
However, in such a market firms which are market leaders and possess around<br />
50 per cent market share have far greater dominance than in a relatively concentrated<br />
but more equally divided market. In the relevant market, DLF Ltd. faces negligible<br />
threat from its rivals, including the new ones, particularly, since it has a strong<br />
presence in almost all related real estate sectors. All these factors indicate that DLF<br />
Ltd. is fully capable of operating independently of competitive forces in the relevant<br />
market. Thus, conditions laid down in Explanation (a)(i) to Section 4 are satisfied.<br />
12.79 DLF Ltd. has at one stage argued that the clauses in its agreement with buyers<br />
are normal industry practices. We have already observed that industry practices<br />
emanate from market leaders and are followed by the rest. Such a market leader is<br />
not constrained to adopt practices initiated by minor players. Under the facts and<br />
circumstances of the case, if DLF Ltd. were to modify the format of its agreement and<br />
make it more buyer friendly, it would be able to assert sufficient pressure on its<br />
competitors to follow suit.<br />
12.80 Similarly, by offering a few value added services, DLF would be able to exert a<br />
multiplier effect on non-price competition, which would sway the consumers in its<br />
favour. A live example of such market power is the project of Belaire itself where<br />
bookings were made despite the awareness that all necessary clearances were not in<br />
place. Due to the real and perceived position of strength that DLF Ltd. enjoys in the<br />
eyes of the consumers, it was able to attract buyers despite the uncertainty regarding<br />
the project.<br />
12.81 If an enterprise has the ability to influence its competitors or the consumers in<br />
a relevant market, as demonstrated above, there could be little doubt in its ability to<br />
influence the market itself in its favour. An announcement of several large projects<br />
by DLF Ltd. at one go could make its competitors react by holding some of their own<br />
projects to avoid market saturation. Similarly, prospective consumers may defer<br />
their demand in expectation of availability of projects to be offered by the market<br />
leader. Thus, DLF Ltd. would be able to influence both the supply and demand of<br />
projects in the relevant market. These possibilities indicate that DLF Ltd. has a<br />
position of strength as envisaged in Explanation (a)(ii) to Section 4 of the Act.<br />
12.82 It should be noted that dominance is neither acquired nor asserted in a transient<br />
moment in time. It takes years for an enterprise to acquire a position of strength and<br />
its conduct has to be examined over a period of time in most cases to ascertain<br />
whether it constituted abuse. Use of snapshot data of market shares or market<br />
presence based on current active stock figures would give a false picture that, if<br />
applied in the context of the Act, may even cause avoidable harm to the market.<br />
Therefore, our assessment of dominant position is by looking at the profile, presence<br />
and achievements of DLF Ltd. over the years as well as its conduct, particularly in<br />
relation to consumers, over a period of time.<br />
12.83 In this context, and having earlier examined the facts of the case in the light of<br />
many other factors mentioned in Section 19(4), the Commission thought it appropriate<br />
to consider whether DLF Can be said to be a market leader in real estate sector, and<br />
whether this would also be a relevant factor under Section 19(4)(m) for determination<br />
regarding “dominance” of DLF.<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0311<br />
12.84 In the context, apart from the earlier information regarding DLF, the following<br />
statements of DLF may be quoted from its website:<br />
We and our predecessors have been steadily building our real estate business<br />
since 1946. Historically, our business has had a particular focus on real estate<br />
development in the NCR, which includes Delhi and adjacent areas such as<br />
Gurgaon...... we developed some of the first residential colonies in Delhi such as<br />
Krishna Nagar in East Delhi, which was completed in 1949. Since, then we have<br />
been responsible for the development of many of Delhi’s other well-known urban<br />
colonies, including South Extension, Greater Kailash, Kailash Colony and<br />
Hauz Khas.<br />
Following the passage of the Delhi Development Act in 1957, the State assumed<br />
control of real estate development activities in Delhi, which resulted in restrictions<br />
on private real estate colony development. We, therefore, commenced acquiring<br />
land at relatively low cost outside the area controlled by the DDA, particularly in<br />
the district of Gurgaon in the adjacent State of Haryana. This led to our first<br />
development, DLF Qutab Enclave, which has evolved into DLF City, our landmark<br />
project. DLF City is spread over 3,000 acres in Gurgaon and is an integrated<br />
township which includes residential, commercial and retail properties in a<br />
modern city infrastructure with schools, hospitals, hotels, shopping malls and a<br />
leading gold and country club. DLF City incorporates Cybercity, our leading<br />
commercial development which when completed is expected to have developed<br />
area of approximately 20 million square feet.<br />
12.85 The following statement of Chairman of DLF may also be quoted from the<br />
website. “I am acutely aware that. ...my company DLF is today regarded as the<br />
largest real estate developer in the world and has a pan-Indian presence with<br />
over 50 million sq. feet under construction.....”<br />
12.86 The Commission has noted that this provides a historical perspective of the<br />
activities, growth and stature of DLF in the real estate sector. This information,<br />
though mostly relating to the period before the Act come into force, is still relevant<br />
since present day market leadership in any product/service is the consequence of<br />
historical development of that sector and firms operating therein. In conformity<br />
with information dealt with earlier, this makes it evident that as of today DLF is a<br />
market leader in real estate sector.<br />
12.87 A market leader, by definition, enjoys a unique position in the market. A unique<br />
interplay of, and casual relationships between, the various factors which give the<br />
firm a leadership position also give it the ability to act independently of its competitor.<br />
It has the ability to influence many of the factors which determine the market and its<br />
characteristics themselves. It can often lay down the rules of the game, which<br />
power/strength it could naturally tend to exercise in its favour to the potential<br />
detriment of the competitors and consumers’ interests. A market leader would,<br />
therefore, normally have dominance in the market, and could be considered on this<br />
basis itself, to be a dominant firm in the relevant market in terms of provisions of<br />
Section 4 of the Act. The Commission is of the view that DLF enjoys the position of<br />
market leader in the real estate sector in general, and in the relevant market in<br />
particular, and this is a relevant factor under Section 19(4)(m) for holding that it has<br />
a dominant position in the relevant market.<br />
12.88 The reference to orders of this Commission passed in the case of BPTP and<br />
M/s. Parshvanath Developers India Ltd. is out of context as in both cases, it was merely<br />
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a prima facie assessment of dominant position and neither of the two enterprises<br />
enjoyed the wide spectrum of strengths as do DLF Ltd. and its subsidiaries in the<br />
relevant market. Moreover, the relevant market under consideration in both the<br />
cases was different from the relevant market in this, case and therefore, the cases are<br />
differentiated on facts.<br />
12.89 In view of the above, this Commission concludes that DLF Ltd. is in a dominant<br />
position in the relevant market in the context of Section 4 read with Section 19(4) of<br />
the Act.<br />
Issue 4<br />
In case DLF Ltd. is found to be dominant, is there any abuse of its dominant position<br />
in the relevant market by the above party?<br />
12.90 The Commission has gone through the entire Apartment Buyers Agreement<br />
(referred to as Agreement hereinafter) very carefully for the purpose of determination<br />
of this issue, considered the impact of conditions imposed and specifically noted a<br />
number of terms therein, including the following:<br />
(i) Unilateral changes in agreement and supersession of terms by DLF without<br />
any right to the Allottees:<br />
...the Company has acquired some lands........such lands as and when<br />
licensed and approved by the Competent Authority (IES), shall be deemed<br />
to be a part of the approved layout plan of Phase-V.....this Agreement shall<br />
automatically stand superseded and be substituted by such subsequently<br />
approved layout plan(s) of Phase-V and shall be deemed to form a part of<br />
this Agreement. (Ref.: representation B of the Agreement).<br />
(ii) DLF’s right to change the layout plan without consent of Allottees:<br />
...the apartment Allottee hereby agrees that it shall not be necessary on the<br />
part of the Company to seek consent of the Apartment Allottee for the purpose<br />
of making any changes in order to comply with such directions/conditions/<br />
changes and that the layout plan of Phase-V as may be amended and<br />
approved form time to time (Ref. representation C of the Agreement)<br />
(iii) Discretion of DLF to change inter se areas for different uses like residential,<br />
commercial, etc. without even informing Allottees:<br />
...with each zone as may be earmarked for residential, commercial or other<br />
uses, provided however, the total number of zones and their earmarked uses<br />
may be changed as per the directions of the Competent Authority(ies) or at the<br />
sole discretion of the Company (Ref.: representation E of the Agreement)<br />
(iv) Preferential location charges paid up-front, but when the Allottee does not get<br />
the location, he only gets the refund/adjustment of amount at the time of last<br />
instalment, that too without any interest:<br />
The Apartment Allottee hereby agrees to pay additionally as preferential<br />
location charges... the apartment Allottee has specifically agreed that due to<br />
any change in layout/building plan, the said apartment ceases to be in<br />
preferential location, the Company shall be liable to refund only the amount<br />
of preferential location charges without any interest...in the last installment<br />
as stated in schedule of payment... (Ref.: Clause 1.5 of the Agreement)<br />
(v) DLF enjoys unilateral right to increase/decrease super area at its sole discretion<br />
without consulting Allottees who nevertheless are bound to pay additional<br />
amount or accept reduction in area:<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0313<br />
...the Apartment Allottee agrees and undertakes to pay for the increase in<br />
super area immediately on demand by the Company as and when such<br />
demand is intimated to the Apartment Allottee by the Company irrespective<br />
of receipt of the Occupation Certificate and if there shall be a reduction in<br />
the super area, then the refundable amount due to the Apartment Allottee<br />
shall be adjusted by the Company from the final installment as set forth in<br />
the Schedule of Payments in Annexure III (Ref.: Clause 1.6 of the Agreement)<br />
(vi) Proportion of land on which apartment is situated on which Allottees would<br />
have ownership rights shall be decided by DLF at its sole discretion (evidently<br />
with no commitment to follow the established principles in this regard).<br />
It is made clear by the Company and specifically understood by the Apartment<br />
Allottee that the Company may at its sole discretion and for the purpose of<br />
complying with the provisions of Haryana Apartment Ownership Act, 1983<br />
or any other applicable laws substitute the method of calculating the<br />
proportionate share in the ownership of the land beneath the building and/<br />
or common areas and facilities as may be described by the Company in its<br />
sole discretion in any declaration by calculating the same in the ratio of his/<br />
her apartment’s value to the total value of the said building (s)/project/<br />
scheme, as the case may be, and that the Apartment Allottee agrees not to<br />
raise any objections in this regard (Ref.: Clause 1.7(iii) of the Agreement)<br />
(vii) DLF continues to enjoy full rights on the community buildings/sites/<br />
recreational and sporting activities including maintenance, with the Allottees<br />
having no rights in this regard:<br />
...the Company has made it specifically clear to the apartment Allottee...<br />
that the Company is free to deal with community buildings/sites/<br />
recreational and sporting activities. ..in any manner as the Company may<br />
deem fit. (Ref.: Clause 1.7(viii) of the Agreement).<br />
(viii) DLF has sole discretion to link one project to other projects, with consequent<br />
impact on ambience and quality of living, with the Allottees having no right<br />
to object:<br />
It is further clarified by the Company and agreed to by the Apartment Allottee<br />
that the Company may at its sole discretion make The Belaire project a part<br />
of any other adjacent project that has already come into existence or may be<br />
constructed in future at any time or keep it separate as an independent<br />
estate and the Apartment Allottee shall not raise may objection for such<br />
formation (Ref.: Clause 1.9 of the Agreement)<br />
(ix) Allottees liable to pay external development charges, without there being<br />
disclosed in advance and even if these are enhanced:<br />
It is made clear by the Company and agreed by Apartment Allottee that the<br />
payment of External Development Charges shall always be solely to the<br />
account of Apartment Allottee to be borne and paid by all the Apartment<br />
Allottees... In the event of such charges remaining unpaid, the Apartment<br />
Allottee shall have no right, title and interest left in the apartment thereafter.<br />
The Apartment Allottee further agrees that he/she would not be competent to<br />
challenge such action of resumption of the said apartment by the Company<br />
due to default of non-payment of such enhanced external development charges<br />
on the part of the Apartment Allottee. (Ref.: Clause 1.11(a) of the Agreement)<br />
(x) Total discretion of DLF regarding arrangement for power supply and rates<br />
levied for the same:<br />
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...the Company or its agents may at their sole discretion...enter into the<br />
arrangement of generating and/or supplying power...... Allottee.......gives<br />
complete consent to such an arrangement including it being an exclusive<br />
source of power supply...... and has noted the possibility of its being to the<br />
exclusion of power supply from DHBVN/State Electricity Boards..... It is<br />
further agreed and confirmed by the Apartment Allottee that the Company<br />
or its agents shall have the right to charge tariff for providing/supplying<br />
the power at the rate as may be fixed from time to time by the Company<br />
which may or may not be limited to the rate then charged by the DHBVN/<br />
State Electricity Boards... (Ref.: see Clause 1.14 of the Agreement)<br />
(xi) Arbitrary forfeiture of amounts paid by the Allottees in many situations:<br />
The Apartment Allottee hereby authorises the Company to forfeit out of the<br />
amounts paid/ payable by him/her, the earnest money as aforementioned<br />
together with any interest paid, due or payable along with and any other<br />
amount of a non-refundable nature including brokerage paid by the Company<br />
to the brokers in case of booking is done through a broker......in the event of the<br />
failure of the Apartment Allottee to perform his/her obligations or fulfill all<br />
the terms and conditions set out in the application and/or this Agreement<br />
executed by the Apartment or in the event or failure of the Apartment Allottee<br />
to sign and return this Agreement in its original form to the Company within<br />
30 days of its dispatch by the Company. (Ref.: Clause 4 of the Agreement)<br />
(xii) Allottees have no exit option except when DLF fails to deliver possession<br />
within agreed time, but even in that event he gets his money refunded without<br />
interest only after sale of said apartment by DLF to someone else:<br />
...the Company shall be unable to or fails to deliver possession of the said<br />
Apartment to the Apartment Allottee within three years...the Apartment<br />
Allottee shall be entitled to give notice to the Company...in that event the<br />
Company shall be at liberty to sell and/or dispose of the said Apartment<br />
and the allotted parking space to any other party...without accounting for<br />
the sale proceeds thereof to the Apartment Allottee....the Company shall<br />
within 90 days from the date of full realisation of the sale price after sale of<br />
said apartment and the parking space refund to the Apartment Allottee,<br />
without any interest, the amount paid by him/her in respect of the said<br />
Apartment and the parking space... (Ref.: Clause 11.3 of the Agreement)<br />
(xiii) DLF’s exit Clause gives them full discretion, including abandoning the project,<br />
without any penalty:<br />
The Apartment Allottee agrees that in consequence of the Company<br />
abandoning the Scheme or becoming unable to give possession within three<br />
(03) years from the date of execution of this Agreement...the Company shall<br />
be entitled to terminate this Agreement whereupon the Company’s liability<br />
shall be limited to refund of the amounts paid by the Apartment Allottee<br />
with a simple interest @9 per cent per annum for the period such amounts<br />
were lying with the Company and to pay no other compensation<br />
whatsoever.... the Company may, at its sole option and discretion... agrees<br />
to pay... compensation @ Rs. 5 per sq. ft. of the super area of the said<br />
Apartment per month for the period of such delay beyond three (03) years or<br />
such extended periods... (Ref.: Clause 11.4 of the Agreement)<br />
(xiv) DLF has sole authority to make additions/alterations in the buildings, with<br />
all the benefits flowing to DLF, with the Allottees having no say in this regard:<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0315<br />
The Company shall have right, without any approval from any Apartment<br />
Allottee in the said Building to make any alterations, additions, improvements<br />
or repairs whether structural or nonstructural, interior or exterior, ordinary<br />
or extra ordinary in relation to any unsold apartment(s) within the said<br />
Building and the Apartment Allottee agrees not to raise objections or make<br />
any claims on this account..... The Apartment Allottee agrees and authorises<br />
the Company to make additions to or put up additional structures in/upon<br />
the said Building or Additional Apartment Building(s) and/or structures<br />
anywhere in the said Complex/Said Portion of Land as may be permitted by<br />
Competent Authorities and such additional Apartment Building(s) structures<br />
shall be the sole property of the Company which the Company will be entitled<br />
to dispose of in any way it choose without any interference on the part of the<br />
Apartment Allottee(s). (Ref.: Clauses 20 and 22 of the Agreement)<br />
(xv) Third party rights created without Allottees consent, to the detriment of<br />
Allottees” interests:<br />
The Apartment Allottee hereby authorises and permits the Company to raise<br />
finance/loan from any Financial Institution/Bank by way of mortgage/Charge/<br />
securitisation of receivables or in any other mode or manner by charge/mortgage<br />
of the said Apartment/said Building/said Complex/said Portion of Land subject<br />
to the condition that the said Apartment shall be free from all encumbrances at<br />
the time of execution of conveyance deed. The Company/Financial Institution/<br />
Bank shall always have the first lien/charge on the said Apartment for all their<br />
dues and other sums payable by the Apartment Allottee or in in respect of any<br />
loan granted to the Company for the purpose of the construction of the said<br />
Building/ said Complex. (Ref.: Clause 23 of the Agreement)<br />
(xvi) Punitive penalty for default by Allottees, insignificant penalty for DLF’s default:<br />
The Company may, at its sole option and discretion... waive the breach by the<br />
Apartment Allottee in not making payments as per the Schedule of Payments<br />
given in Annexure III but on the condition that the Apartment Allottee shall pay<br />
the Company interest which shall be charged for the first 90 days after the due<br />
date @ 15 per cent per annum and for all periods of delay exceeding the first<br />
90 days after the due date an additional penal interest @ 3 per cent per annum<br />
(total interest 18 per cent per annum only)... (Ref.: Clause 35 of the Agreement)<br />
12.91 It is further evident that the conditions of the Agreement are imposed on the<br />
buyers/Allottee through “important instructions to intending Allotees” printed on<br />
the Agreement. The said instructions read:<br />
If the intending Allotee(s)... to execute and deliver to the Company the Apartment<br />
Buyer’s Agreement in its original form duly signed within thirty (30) days from<br />
the date of dispatch.... The Company shall reject and refuse to execute any<br />
Apartment Buyer’s Agreement wherein the Intending Allottee has made any<br />
corrections/cancellations/alterations/modifications. The Company reserves the<br />
right to reject to reject any Apartment Buyer’s Agreement executed by any<br />
Intending Allottee without any cause or explanation or without assigning any<br />
reasons therefore, and to refuse to execute the Apartment Buyer’s Agreement...<br />
the decision of the company shall be final and binding.<br />
12.92 Thus even when DLF sent the said agreement for signing by the Allottees, they<br />
had absolutely no right to suggest/make any alteration/modification whatsoever<br />
in the said agreement; and if they refuse to sign the agreement at that point of time<br />
the money deposited earlier stood forfeited. In other words even before the Agreement,<br />
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including the above illustrative Clauses, was signed by the apartment Allottees,<br />
once they had deposited the earnest money, had no option to exit except at a<br />
considerable financial loss. In other words, having deposited the earnest money, the<br />
Allottees options to change his choice for any reason, including not agreeing with<br />
the terms of the Agreement, stood foreclosed, even without having entered into any<br />
Agreement till that stage.<br />
12.93 It may be noted that the informant had alleged that earnest money and certain<br />
other payments had to be made even before signing of the Apartment Buyer<br />
Agreement with DLF. It has been brought to the notice of the Commission that the<br />
extent of abuse is so gross that the buyer/Allottee has to pay almost 95 per cent of<br />
the consideration amount within 27 months of booking, and a bulk of this is often<br />
paid to DLF even before entering into the Agreement. It is also noted that though<br />
DLF provides a stringent time-line for payment of agreed amount, there is no time-line<br />
specified for delivery of possession by DLF. Further, Agreement is often sent by DLF<br />
for signing much after initial payment by the buyer. In such cases, the buyer who<br />
could have made a choice to go to other real estate service providers, gets locked in<br />
with DLF having paid a substantial amount, with no free exit option, without even<br />
being aware of the sweeping terms and conditions being imposed through the<br />
Agreement. The high switching cost not only destroys the choice, it also reduces<br />
mobility in the market. Information asymmetry created by such lock-in, in absence of<br />
the knowledge of terms and conditions of the Agreement is having distortionary<br />
effect not only on the competition in the market but also on consumer welfare.<br />
12.94 Thus, the Allottees become captured consumers who are subject to abuse by<br />
DLF through imposition of unfair conditions contained in the Agreement. Such abuse<br />
is not a one-time abuse by DLF, rather it continues throughout the span of the period<br />
of construction, and Allottees are subjected, or there is a scope to subject them time and<br />
again, to newer conditions aggravating the existing abusive conduct of DLF.<br />
12.95 The investigation report of the DG has comprehensively examined various<br />
aspects of the conduct of DLF Ltd. in the case in context of the information filed.<br />
Briefly, these are recapitulated below:<br />
(i) Commencement of project without sanction/approval of the projects<br />
(ii) Increase in number of floors mid-way<br />
(iii) Increasing of Floor Area Ratio (FAR) and Density Per Acre (DPA)<br />
(iv) Inordinate delay in completion and possession<br />
(v) Forfeiture of amounts<br />
(vi) Clauses of agreement are heavily biased in favour of DLF Ltd. and against the<br />
consumers<br />
12.96 DLF Ltd. challenged the above conclusions of abusive conduct cited by the DG<br />
in its submissions before the Commission. Apart from arguments in respect of the<br />
above conduct, DLF Ltd. also contended that they had voluntarily given a large<br />
number of benefits to the Allottees. In this regard, the view of the Commission is that<br />
one unfair condition cannot be counter balanced and wiped out by another seemingly<br />
fair or propitiating act.<br />
12.97 DLF Ltd. has given justifications for cancellation of allotment and stated that<br />
it was done only in cases of defaults and was in terms of the Buyers’ Agreement. It<br />
has also contended that there was no delay in possession in terms of the said<br />
agreement. It has also contended that all approvals and clearances are in place and<br />
that there has been no violation of FAR or DPA norms. It was also argued that<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)<br />
0317<br />
Applicants had the opportunity to read the Clauses of the agreement, and therefore,<br />
DLF Ltd. cannot be faulted if the Applicants later found any issues in the Clauses.<br />
12.98 The Commission has given due consideration to the detailed submissions<br />
made by DLF Ltd. in this regard. There are a few facts that reveal a certain picture of<br />
the way the bookings and allotments took place that is relevant to at this point.<br />
Certain bookings were made as far back as August 2006 and substantial amounts<br />
running in several hundred thousands was taken by DLF Ltd. At that point in time<br />
necessary approvals from agencies like the Airport Authority of India, HUDA and<br />
DTCP had not been obtained by the developer. Moreover, the building was to be of<br />
19 floors only. The application for approval was moved in December 2008 and the<br />
approval for the revised plan came only in August 2009 - full three years after the<br />
first bookings were made. The revised plan did not increase the number of floors by<br />
a couple of stories but by 10 floors, that is almost by 50 per cent more. The buyers’<br />
agreement gave an impression that the project would be completed in 3 years however,<br />
the dates of possession kept shifting forward and even as on date, the possession is<br />
supposed to be given around October 2011.<br />
12.99 Furthermore, it is only understandable that Applicants who had paid substantial<br />
sums of advance deposits for the booking would get concerned due to inordinate<br />
project delays as was the case here. But their genuine anxiety was met with utter<br />
disregard and insensitivity by DLF Ltd. When out of sheer desperation some Allottees<br />
stopped payment to create pressure on DLF Ltd. their allotments were cancelled and<br />
huge deposits were forfeited. For those who succumbed to these unilateral and<br />
retaliatory conduct, DLF Ltd. charged heavy interests on delayed payments.<br />
12.100 Another feature of this far from healthy relationship between the service<br />
provider and its clients is the draconian and one-sided Clauses in the buyers’<br />
agreement. The DG’s report has mentioned these in detail and some extracts have<br />
been given earlier in this order also, therefore, it is not necessary to repeat all of them<br />
here. However, reference of just a few of those Clauses would reveal the texture of<br />
relationship DLF Ltd. has sought to develop with its consumers.<br />
12.101 There are Clauses that give DLF Ltd. sole discretion in respect of change of<br />
zoning plans, usage patterns, carpet area, alteration of structure, etc. In case of change in<br />
location of the apartment, PLC is determined at the discretion of the builder and if a<br />
refund is due, no interest is paid. No rights have been given to the buyers for raising any<br />
objections. Further, even if the buyer has paid the full amount, the builder can raise<br />
subordinate mortgage on the property for finances raised for its own purpose and the<br />
consumers are subjected to this mortgage. Despite knowing that necessary approvals<br />
were pending at the time of collection of deposits, DLF Ltd. inserted Clauses that made<br />
exit next to impossible for the buyers. Similarly, in event of delay, the builder would pay<br />
compensation at Rs. 5 per square foot per month for delays beyond three years. In sharp<br />
contrast, if there is a delay on part of the buyer, the interest charged is 15 per cent<br />
per annum for the first 90 days, increasing by another 3 per cent after that.<br />
12.102 These are some of the Clauses that show how heavily loaded the buyers”<br />
agreement is in favour of DLF Ltd. and against the buyer. Under normal market<br />
scenario, a seller would be wary of including such one-sided and biased Clauses in<br />
its agreements with consumers. The impunity with which these Clauses have been<br />
imposed, the brutal disregard to consumer right that has been displayed in its action<br />
of cancelling allotments and forfeiting deposits and the deliberate strategy of<br />
obfuscating the terms and keeping buyers in the dark about the eventual shape, size,<br />
location, etc. of the apartment cannot be termed as fair. The course the progress of<br />
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the project has taken again indicate that DLF Ltd. beguiled and entrapped buyers<br />
through false solicitations and promises.<br />
12.103 The point under contention is not whether such one-sided Clauses favouring<br />
DLF Ltd. and putting the Allottees in a position of distinct disadvantage were part<br />
of an “agreement” and hence contractual obligation, as argued by the OP-1. The<br />
moot point in this case and indeed the competition concern is that a dominant<br />
builder/developer is in a position to impose such blatantly unfair conditions in its<br />
“agreement” with its customers and bind them in such one-sided contractual<br />
obligation. In a competitive scenario, where the enterprise indulges in such<br />
anti-consumer conduct, there is sufficient competition in the market to provide easy<br />
alternatives for the consumer. The competitive forces would ensure that the builder/<br />
developer would soon face loss of customers, which would force it to become more<br />
consumer-friendly. However, only when a dominant enterprise indulges in such<br />
conduct is there little hope for the consumers because not only that enterprise<br />
indulges in such behaviour with impunity but smaller competitors would want to<br />
enjoy as much advantage by following the leader. Since, a weaker competitor is not<br />
in a position to take on the competitive might of the dominant enterprise, it would<br />
rather emulate the dominant enterprise and take similar advantage of the consumers.<br />
12.104 It is noted that the Competition Act only requires this Commission to ascertain<br />
if some conduct is “unfair” in terms of Section 4 of the Act and is being carried on by<br />
a dominant enterprise. This Commission has no doubt that the nature of Clauses<br />
and conduct as indicated in earlier paras are blatantly unfair, even exploitative. The<br />
dominant position of DLF Ltd. has already been established. Therefore, we find no<br />
force in the arguments of the OP-1 in this regard.<br />
12.105 As regards, legality of actions like violations of FAR or increasing density<br />
per acre are concerned, per se, these are not competition issues and have to be looked<br />
into by the Competent Authorities. However, this Commission is of the view that<br />
both these factors have gone against the interests of the consumers. The person who<br />
chooses a particular apartment does so after considering factors such as FAR,<br />
availability of bigger common areas, common facilities, etc. If the number of<br />
apartments in a project is substantially increased, as in this case, there is considerable<br />
reduction of consumer welfare. For example, if a hundred residents are supposed to<br />
share one swimming pool, their satisfaction from that common pool would be far<br />
less if suddenly the builder tells them they have to share the pool with 200 residents.<br />
In economics, “value” is based on the perceived utility of any product or service.<br />
Consumers pay according to this perception. If something is done that drastically or<br />
substantially reduces that perceived value, it can only be termed as an unfair conduct<br />
by the seller. Under Competition Act, such unfair conduct by a dominant enterprise<br />
is contravention of the provisions of the Act.<br />
12.106 An argument has been extended that in the agreement, the Clauses which<br />
allegedly amount to abuse of dominance are as per “industry practice.” DLF has<br />
also given certain comparative tabular statements in support of this argument. The<br />
material available on record in regard to the comparative picture of such Clauses has<br />
been considered by the Commission. It has been noted that the agreements of other<br />
service providers and competitors submitted by DLF, though not identical, have<br />
certain similarities and common points. The question arises whether this can be<br />
treated as an industry practice and, if so, whether this can be a defence for DLF in<br />
this case keeping in view the provisions of the Act, including the reference to<br />
“practices” in Section 3(3).<br />
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Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
0319<br />
12.107 It is evident from material on record that DLF is by far the oldest real estate<br />
service provider in the country. The extracts from DLF websites quoted in paras<br />
earlier substantiate this conclusion.<br />
The information/data considered in this order earlier in regard to size and resources<br />
of DLF while determining Issue No. 3, and the speech of Chairman, DLF Group<br />
quoted earlier also clearly highlight the dominant position of DLF in the country as<br />
a whole, as also in Gurgaon.<br />
12.108 It is evident that a company of this size, which has been operating at a big<br />
scale much before any competitor came on the scene, would automatically be a<br />
trendsetter in the sector in which it operates. All the material and evidence on record<br />
confirms that DLF has been, and continues to be, a market leader as a real estate<br />
service provider. As such, it is DLF which would have initiated and developed the<br />
practices which would have been followed by the later entrants, and over a period of<br />
time could be considered as “industry practices”. Therefore, even without taking<br />
into account the fact that being an industry practice cannot be a defence for<br />
anti-competitive practices/conduct, DLF for one certainly cannot claim the defence<br />
of having adopted an industry practice for practices which are found to be<br />
anti-competitive and/or abusive.<br />
12.109 In view of the foregoing discussion, this Commission finds DLF Ltd. in<br />
contravention of Section 4(2)(a)(i) of the Act.<br />
Other Concerns<br />
12.110 During the course of dealing with this case, the Commission has come across<br />
a number of facts which could impinge adversely on the consumers’ interests, and<br />
indicate some aspects of the modus operandi of DLF which may need to be looked into<br />
by the Appropriate Authorities. Even though these are not issues which fall within<br />
the ambit of anti-competitive conduct, keeping in view the mandate in the Preamble<br />
and Section 18 of the Act “to protect the interests of consumers” the Commission<br />
considers it appropriate to note/illustrate some of these facts in the order.<br />
12.111 The examination of this case has brought forth several areas of concern<br />
pertaining to the housing sector in India. The Commission feels that although there<br />
is a plethora of laws, there is no proper regulation of the real estate sector, particularly<br />
the housing sector. In order to promote overall consumer welfare, to ensure free and<br />
fair competition in real estate residential market and to set standards of conduct of<br />
enterprises engaged in similar nature of trade, the Commission, therefore, makes a<br />
strong recommendation to the Central Government and all State Governments to<br />
come out with real estate regulations at the earliest for ensuring overall consumer<br />
welfare and to discourage unfair trade practices that seem prevalent in the sector.<br />
12.112 The Commission has, inter alia, noted the following facts about the<br />
conduct of DLF, which apparently is followed by other service providers also:<br />
(i) They issue advertisements for launching projects without the land in question<br />
being actually purchased, registered in their name and possession taken and<br />
without taking prior approval of Competent Authorities.<br />
(ii) They do not specify the total area of the plot/flat/house indicating clearly the<br />
carpet area and utility area.<br />
(iii) They do not specify the date of delivery and consequential remedies available<br />
to the consumer in case of delay.<br />
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(iv) The amount collected from the Allottees against a particular project is not<br />
deposited in a designated escrow account and utilised only for the construction<br />
of the concerned building.<br />
(v) The information relating to the progress of works and status of account of each<br />
Allottee is not made available to buyers in a transparent manner.<br />
(vi) They build in hidden costs other than the initial set price.<br />
(vii) They do not post all the relevant information on internet and make them<br />
available in public domain. There is no transparent and participatory<br />
mechanism put in place to deal with escalation in price, if any.<br />
(viii) There is often inordinate delay in execution of the project and if the project is<br />
delayed without previously agreed valid reasons, there is no provision that<br />
would entail pre-determined amount of penalties on total project to be paid to<br />
the consumers.<br />
(ix) There is no fair, participatory and transparent mechanism to tackle any<br />
substantive and major changes in the project mid-way, before taking approval<br />
of the authorities for the revised scheme and commencing construction thereon.<br />
Changes in FAR or density per acre, exclusion of some common facilities or<br />
substantive changes in design and layout are not included in the category of<br />
substantive or major changes. The description of substantive or major changes<br />
as well as the mechanism for decision making is not clearly given in the Buyers’<br />
Agreement.<br />
12.113 It appears from the above and other facts that DLF, at times, goes ahead with<br />
planning and execution of projects without first obtaining the necessary regulatory<br />
approvals from development and other authorities. Further, the deployment and use<br />
of funds, as also pricing of these products, also does not seem to be based on transparent<br />
principles or basis. Money deposited by Allottees of one project may well be being<br />
used for other projects/purposes, since there is no system of keeping separate accounts<br />
or keeping the money in escrow accounts. Indeed, it appears that various deposits by<br />
Allottees become part of a large pool of funds, which may be deployed for any purpose<br />
at the discretion of DLF, without necessarily having a linkage with the purpose for<br />
which the money was deposited. This fact assumes much greater significance in view<br />
of the huge land bank with DLF, and the large number of projects it takes across the<br />
country. The ability of DLF to launch projects without prior approvals, and make<br />
major changes midway through the projects, also raises a host of issues. It is not clear<br />
as to what is the basis of DLF’s confidence, and what gives them the risk-taking<br />
ability, to go ahead at will in anticipation of necessary approvals, and it would not be<br />
correct for the Commission to speculate on the reasons for this or take into account any<br />
unverified explanations in this regard. But it is appropriate that the concerned<br />
authorities give due consideration to these issues.<br />
12.114 Be as it may, the Commission hopes that all these, and similar/related other<br />
factors impinging adversely on the consumers’ interests, would be taken note of by<br />
concerned authorities for effective remedial action. The responsibility of such<br />
authorities assumes even greater importance in view of the fact that these consumers<br />
are normally not in a position to organise or act meaningfully for redressal of their<br />
grievances, or the protection of their interests, even though often their life-savings<br />
may be at stake. The absence of any single sectoral regulator to regulate the real estate<br />
sector in totality, so as to ensure adoption of transparent and ethical business<br />
practices and protect the consumers, has only made the situation in the real estate<br />
sector worse.<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
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g<br />
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i<br />
2011]<br />
Belaire Owner’s Association v. DLF Limited and Anr.<br />
(Ashok Chawla, Chairman; Dr. Geeta Gouri, Anurag Goel, M.L. Tayal (Members))<br />
13. Decision under Section 27 of the Competition Act, 2002<br />
0321<br />
13.1 In the preceding discussion, this Commission has concluded that the instant<br />
case is within the jurisdiction of the Competition Act, 2002. Therefore, in accordance<br />
with provisions of the Act, it has delineated the relevant market as the market for<br />
services of developer/builder in respect of high-end residential properties in<br />
Gurgaon. In the relevant market, OP-1, DLF Ltd. has a dominant position within the<br />
meaning of the term as per Explanation (a) to Section 4, read with Section 19(4).<br />
Finally, the Commission has concluded that DLF Ltd. is in contravention of<br />
Section 4(2)(a)(i) by imposing unfair conditions on the sale of its services<br />
to consumers.<br />
13.2 In the facts and circumstances of the case, the Commission has examined the<br />
role of Opposite Parties 2 and 3, viz. HUDA and DTCP of Government of Haryana.<br />
It is seen that these are agencies or authorities of the State Government whose role is<br />
limited to granting various approvals to builders/developers. They are not providing<br />
any services of a commercial nature of the kind provided by the DLF group or its<br />
competitors. Thus, their conduct does not come within the ambit of Section 4 of<br />
the Act.<br />
13.3 In Paras 12.90 and 12.95 supra, this order lists conditions imposed by DLF Ltd.<br />
and its group companies on its consumers/buyers in detail. These conditions have<br />
been held to be unfair in terms of Section 4(2)(a)(i) of the Act and hence, in<br />
contravention of Section 4. In view of the above, and in exercise of powers under<br />
Section 27(a) of the Act, the Commission directs DLF Ltd. and its group companies<br />
offering services of building/developing:<br />
(i) to cease and desist from formulating and imposing such unfair conditions in<br />
its agreements with buyers in Gurgaon.<br />
(ii) to suitably modify unfair conditions imposed on its buyers as referred to above,<br />
within three months of the date of receipt of this order.<br />
13.4 The abuse of dominant position in this case is in respect of the basic necessity<br />
of housing. The earlier deliberation on the elements and extent of abuse make it clear<br />
that DLF has been grossly abusing its dominant position, and that too against a<br />
vulnerable Section of consumers, who have little ability to act or organise against<br />
such abuse. The penalty, therefore, has to be commensurate with the severity of the<br />
violation through such blatant abuse of dominance.<br />
13.5 There appear to be no mitigating factors for taking a lenient view as the abusive<br />
practices referred to above have been carried with the object of undue economic<br />
gains and business profits. On the other hand, the consistent practice of executing<br />
unfair conditions and holding out false representations and exploiting the dominant<br />
position has come on record which are certainly aggravating factors. In the view of<br />
the Commission, the conduct of the OP-1 in abusing its dominant position requires<br />
to be taken very seriously and thus, the Commission is required to adopt a deterrent<br />
approach so that recurrence of such conduct is stopped.<br />
13.6 The facts of this case and the conduct of the OP-1, as discussed above,<br />
particularly the size and resources of OP-1 and the duration during which this<br />
abuse has continued to the advantage of DLF Ltd. and to the disadvantage of<br />
consumers, warrant imposition of a heavy penalty. Keeping, in view the totality of<br />
the facts and circumstances of the case, the Commission considers it appropriate to<br />
impose penalty at the rate of 7 per cent of the average of the turnover for the last three<br />
preceding financial years on OP-1. Therefore, in exercise of powers under<br />
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Section 27(b) of the Act, the Commission imposes penalty on DLF Ltd. as<br />
computed below:<br />
Turnover for year ended 31 st March, 2009<br />
Rs 10,035.39 crores<br />
Turnover for year ended 31 st March, 2010<br />
Rs 7,422.87 crores<br />
Turnover for year ended 31 st March, 2011<br />
Rs 9,560.57 crores<br />
Total<br />
Rs 27,018.83 crores<br />
Average (Total/3)<br />
Rs 9006.27 crores<br />
7 per cent of average Rs 630.43 crores<br />
Penalty rounded off to nearest number<br />
Rs 630 crores<br />
(or Rs. 6.3 billion)<br />
14. The Secretary is directed to convey this order to the concerned parties. In view of<br />
the observations of the Commission at Paras 12.110 to 12.114 above, the Secretary is<br />
also directed to convey the same to the concerned Central Government and State<br />
Government authorities with a request for consideration and suitable action on<br />
their part.<br />
R. Prasad, Member (Supplementary)<br />
15. Orders have been passed by the Commission in this case today with which I am<br />
in agreement and which I have also signed. But I would like to further add the<br />
following:<br />
15.1 In this particular case when a buyer enters the market, he has the choice of<br />
going to a large number of builders for the purpose of purchase of a flat. There is<br />
large competition in the market. But when a consumer makes a choice and enters<br />
into an agreement with a builder he is bound by the agreement and even if he wants<br />
to switch to another builder he has to pay high switching costs. Further, when<br />
consumer enters into an agreement with the builder, an information asymmetry<br />
occurs as all the elements of the agreement are neither read by him nor explained by<br />
the builder. In the US, a concept of “aftermarket abuse” was considered by the<br />
Supreme Court in the case of Eastman Kadak. It is, therefore, necessary to discuss<br />
the issues before the US Supreme Court in the case of Eastman Kodak.<br />
16. In this connection it is necessary to examine the concept of “after market abuse”<br />
as explained by the U.S. Supreme Court in the case of Eastman Kodak Co. v. Image<br />
Tech. SVCS 504 U.S. 451(1992). In this case, Kodak was the seller of photocopying<br />
machines. In the market of photocopying machines Kodak was not a dominant<br />
player. As far as the services and the repair market for the photocopiers was<br />
concerned, Kodak was initially selling the spares to various dealers who used to<br />
service the photocopiers and use the spares supplied by Kodak. Kodak found that<br />
some of these service dealers started developing their own spares to service the<br />
photocopiers and some of them used to give better service than Kodak itself. Kodak,<br />
therefore, changed its business model and asked the equipment manufacturers to<br />
supply the equipment to it only. Kodak then used to sell the spares to those buyers of<br />
Kodak photocopiers who could service them themselves or used to service the<br />
photocopiers with spares in Kodak’s premises. In this manner, Kodak had control<br />
over 100 per cent of the spares and around 85 per cent of the service itself. Thus,<br />
many of the earlier Kodak dealers who used to service the Kodak photocopiers were<br />
driven out of business. These dealers filed an antitrust case against Kodak, The<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
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b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
2011]<br />
Belaire Owner’s Association v. DLF Limited and Anr.<br />
(R. Prasad, Member (Supplementary))<br />
0323<br />
District Court ruled in favour of Kodak. The dealers took the case in appeal to the<br />
Court of appeals for the Ninth Circuit. The Court of appeals held that Kodak’s<br />
approach was anticompetitive, exclusionary and involved a specific intent to<br />
monopolise. Aggrieved against, the judgment of the Court of appeals Kodak went to<br />
the Supreme Court of the USA.<br />
17. The Supreme Court considered the facts of the case. In the opinion of the Supreme<br />
Court there were two markets, i.e. a market of photocopiers where Kodak was not a<br />
significant player. The second market was described by the Supreme Court as an<br />
aftermarket and consisted of service after sales. In this after market, there was a tie in<br />
scenario as spares would be given with the service. The Supreme Court then relied<br />
on its own decisions on market power. In the case of Jefferson Parish 466 US at 14.9,<br />
Supreme Court had held that market power is power “to force a purchaser to do<br />
something that he would not do in a competitive market”. In another case U.S. v. E.I.<br />
du Point de Nemours & Co. 351 U.S. 377, 391(1956), the Supreme Court had defined<br />
market power as “the ability of a single seller to raise price and restrict output”. The<br />
existence of such power is ordinarily inferred from the seller’s possession of a<br />
predominant share in the market Jeffer Parish 466 US 17.1. The Supreme Court then<br />
held that in the aftermarket Kodak enjoyed monopoly power. The Supreme Court<br />
also held that a customer is “locked in” after the purchase of the equipment as the<br />
switching costs are high. The customer can then be subjected to abuse. The Supreme<br />
Court also held that it is a question of fact as to whether information costs and<br />
switching costs and switching costs foil the assumption that the equipment and<br />
service market act as a pure complement to each other. On these facts, the Supreme<br />
Court held that the behaviour of Kodak was anticompetitive.<br />
18. In this particular case also, there are two markets. The first market is where a<br />
consumer enters into an agreement with builder and the second market is the<br />
aftermarket after he has entered into an agreement with the builder and then the<br />
consumer is governed by the agreement which he has entered into with the builder. By<br />
the virtue of the agreement, the builder acquires a dominant position over the consumer.<br />
This issue is covered in Section 19(4)(g) of the Act. The word “otherwise” mentioned<br />
in Section 19(4)(g) is very pertinent. In this particular case, dominance is acquired<br />
through the agreement. Further, provisions of the Section 19(4) defines factors which<br />
the Commission has to consider in its order. The Section is inclusive and, therefore,<br />
has to be given a wide interpretation. In fact, Section 19(4)(m) talks of any other factor<br />
which the Commission may consider relevant for the inquiry. Therefore, while<br />
determining abuse of dominance the Commission is entitled to consider any other<br />
factor which shows that the enterprise is in a dominant position to affects its competitors<br />
or consumers or the relevant market in its favour. In this particular case, the informant<br />
became a captured consumer and he could be discriminated and abused. Therefore,<br />
in this case in the aftermarket as there existed high switching costs and information<br />
asymmetry the abuse of dominance is established. In fact, the decision of the US<br />
Supreme Court in the case of Eastman Kodak has been incorporated in the explanation<br />
to Section 4 read with Section 19(4) of the Act.<br />
19. Considering these facts, there is material to hold that there is contravention of<br />
the provisions of Section 4(2)(a)(i) of the Competition Act. The conditions of service<br />
given by the O.P. are no doubt unfair in accordance with conditions mentioned in<br />
the agreements.<br />
20. As the abuse of dominance is established and it is also established that the<br />
dominance came due to the agreements which the information providers had entered<br />
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into with the O.P., the question which arises is to whether the action of the O.P.<br />
creates an adverse effect on competition in India. In my view, whenever there is an<br />
abuse of dominance due to unfair conditions in the agreements, it creates an adverse<br />
effect on competition in India. Further in this case, the contracts entered into by the<br />
information providers were contracts of adhesion and the agreements entered were<br />
between a very big economic player and small time buyers. In fact, the agreements<br />
were signed in the format given by the O.P. and the consumers had paid substantial<br />
sums of money to the O.P. Thus, if a buyer wanted to shift to another builder, he<br />
would have lost substantial amount of money. Thus, there existed an information<br />
asymmetry and high switching costs. In such, a case where the number of buyers<br />
were limited, a new entrant in the building market would have got no buyer even if<br />
the new builder was more innovative or had better products. Thus, the high switching<br />
cost would foreclose the market for a new builder. The agreements entered into by<br />
the O.P. and the prospective buyers, therefore, created an adverse effect on<br />
competition in India. The agreements, therefore, contravene Section 3(1) of the Act<br />
read with Section 3(2) of the Act.<br />
21. The majority view of the Commission is that there was no abuse of dominance by<br />
Haryana Development Authority and the Department of Town and Country<br />
Planning, Haryana. In this case, original the permission was given by these<br />
authorities for the construction of 19 floors. Later on, these authorities allowed<br />
construction of 29 floors at the instance of O.P. It is unfair to the interest of the buyers<br />
of flats and it may be an irregularity on the part of the authorities. This has to be<br />
examined by the concerned authorities in the State of Haryana.<br />
22. Considering the case, violation of Section 3(1) and Section 4(2)(a)(i) in this case<br />
is established. The levy of penalty of 7 per cent of the average turnover is justified<br />
and I agree with the majority view.<br />
a<br />
b<br />
c<br />
d<br />
e<br />
CASE NO. 12/2010<br />
DECIDED ON: 22.03.2011<br />
2011 CompLR 0324 (CCI)*<br />
COMPETITION COMMISSION OF INDIA<br />
Yashoda Hospital and Research Centre Ltd.<br />
v.<br />
Indiabulls Financial Services Limited (IFSL)<br />
Coram<br />
Dhanendra Kumar, Chairman, H.C. Gupta, P.N. Parashar, Dr. Geeta Gouri, Anurag<br />
Goel and M.L. Tayal and R. Prasad, (Members)<br />
Anti-competitive activities — Referral — Investigation — Whether the pre-payment<br />
penalty and foreclosure charges levied by IFSL on Informant on closure of the said<br />
loan account prior to the date of maturity were anti-competitive and whether by<br />
levying foreclosure charges and pre-payment penalty, IFSL had violated any of<br />
f<br />
g<br />
h<br />
i<br />
* MANU/CO/0009/2011<br />
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2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(Dhanendra Kumar (Chairman), H.C. Gupta, P.N. Parashar, Dr. Geeta Gouri,<br />
Anurag Goel and M.L. Tayal (Members))<br />
0325<br />
the provisions of Section 3 and/or Section 4 of the Competition Act, 2002 — Levy<br />
of pre-payment penalty and foreclosure charges is a widespread practice among<br />
banks — Such charges hindered free movement by borrowers — On examination<br />
of the internal circulars of the banks — Levy of such charges were to deter<br />
competition — Presence of anti-competition.<br />
Abuse of dominant position — Demand of foreclosure charges and pre-penalty for<br />
the unexpired period of loan by OP — Detrimental to competition amongst banks —<br />
Prevents the borrower from switching over to other banks — Act contrary to Sections<br />
3(1), 3(2), 3(3) (a), 3(3) (b), 4(1) and, 4(2)(a)(i) of the Competition Act, 2002 — On<br />
consideration of the report of DG no dominance proved — Lack of relevant evidence.<br />
Investigation report furnished to parties — Imposition of charges does not violate<br />
the Act — Investigation report does not have any evidence to suggest presence of<br />
any agreement with other banks or financial institutions — Company registered<br />
under the Companies Act, 1956 and engaged in provision of financial services —<br />
Activities performed were covered in the definition of “enterprise” under<br />
Section 2(h) of the Act — For application of Section 3(3)(b) there must be two or<br />
more enterprises engaged in identical or similar trade of goods — No such<br />
requirement proved — No concerted activities reported by DG — No violation of<br />
either Section 3 or Section 4 of the Act established — Proceedings closed.<br />
R. Prasad, (Dissenting Opinion)<br />
e<br />
f<br />
g<br />
h<br />
i<br />
Mortgage loan — Levy of pre payment penalty anti competitive — Cartel like<br />
behaviour — Contradicts provisions 3(1), (2) and (3)(a) and (b) as well as 4(1),<br />
(2)(a)(i) of the Competition Act, 2002 — Detrimental to competition amongst<br />
financial institutions — Although a single complaint, but one of class action —<br />
Proved to be in contravention of the Act — Practice to be stopped.<br />
Case Précis<br />
IFSL was a company engaged in provision of financial services and the Informant<br />
was a company engaged in the business of running Super Specialty Hospitals and<br />
Research Institutions in India. A loan against mortgage of property was taken by the<br />
Informant. Before expiry of the loan maturity date, the Informant requested the IFSL<br />
to foreclose the loan account citing the reason of high interest rate. IFSL agreed to<br />
foreclose the loan account on the condition that Informant would pay foreclosure<br />
and pre-payment penalty charges.<br />
Informant alleged abuse of dominant position by OP as was detrimental to<br />
competition amongst the banks in the mortgage loan market and also to the interest<br />
of the borrower as it prevents the borrower from switching over to other banks.<br />
Commission referred the matter to the DG for investigation and the DG reported that<br />
levying of pre-payment penalty and foreclosure charges is a widespread practice<br />
among banks but on examination of the internal circulars of the banks, DG had<br />
drawn the conclusion that the real motive behind levying prepayment penalty were<br />
to deter or limit competition among banks/financial institutions and to enhance<br />
their fee based income . Therefore, deterrence in early repayment or refinancing of<br />
loan was anti competitive and violated provisions of the Section 3(3)(b) read with<br />
Sections 19(3)(a), (c) and (d) of the Act.<br />
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On the report being furnished to the OP and on considering the entire materials on<br />
record the Commission was of the opinion that IFSL was a company registered<br />
under the Companies Act, 1956 and was engaged in provision of financial services<br />
and the activities being performed by the IFSL was covered in the definition of<br />
“enterprise” under Section 2(h) of the Act.<br />
Majority of the Members held that although the DG concluded anti competition but<br />
from the plain reading of the provisions of Section 3(3)(b), it was amply clear that for<br />
its application there must be two or more enterprises engaged in identical or similar<br />
trade whereas, in the present matter the impugned practice of imposing foreclosure<br />
charges was imputed to a single enterprise. Also taking into consideration,<br />
4.88 per cent market share of IFSL the DG had concluded that IFSL was not dominant<br />
in the relevant market and, therefore, it cannot be said to have violated any provisions<br />
of Section 4 of the Act. Hence, proceedings were closed.<br />
However one member gave dissenting view holding that the practice of levying<br />
pre-payment penalty by banks was anti competitive. This practice was also<br />
jeopardising the interest of the borrowers. The Informant did have the choice of<br />
shifting to any other bank other than the Respondent. But when the Informant took<br />
the loan from the Respondent, he entered into an agreement where he agreed to pay<br />
penalty for the foreclosure of the loan. The penalty became the switching cost. Due<br />
to the high switching costs, the Informant became a captured client which could be<br />
discriminated against and abused. Therefore, the OP was a monopolist and exercised<br />
full control over the Informant. The high switching cost was an example of the abuse<br />
for the purposes of Section 4(1) of the Act.<br />
Cases referred to<br />
Commission v. Bayer AG (2004) 4 CMLR 13(Discussed) [p. 0353, para 22 e]<br />
Eastman Kodak Co. v. Image Tech. SVCS504 U.S. 451(1992)(Relied on) [p. 0338, para 19 e]<br />
Jeffer Parish 466 US 17.1(Mentioned) [p. 0339, para 20 b]<br />
Sugar Cartel Case (1969) 3 All ER 1065(Discussed) [p. 0355, para 22 e]<br />
Technip S.A v. S.M.S Holding Private Ltd. MANU/SC/0385/2005: (2005) 5 SCC 465:<br />
III (2005) BC 56 (SC): [2005] 125 CompCas 545 (SC): (2005) 4 CompLJ 385 (SC):<br />
2005 (4) CTC 209: JT 2005 (5) SC 506: [2005] 60 SCL 249 (SC): [2005] Supp (2) SCR<br />
223(Discussed) [p. 0353, para 22 c]<br />
U.S. v. E.I. du Point de Nemours & Co. 351 U.S. 377, 391(1956)(Discussed)<br />
[p. 0339, para 20 a]<br />
United States v. General Motors 384 US 127 (Mentioned) [p. 0353, para 22 d]<br />
Legislations referred to<br />
Competition Act, 2002<br />
Section 2(h) [p. 0330, para 8.1 e]<br />
Section 2(m) [p. 0352, para 22 d]<br />
Section 3 [p. 0328, para 5.1 e]<br />
Section 3(1), 3(2) [p. 0351, para 22 f]<br />
Section 3(3) [p. 0330, para 8.3 i]<br />
Section 3(3)(a), 3(3)(b) [p. 0328, para 3.3 c]<br />
Section 3(3)(c) and (d) [p. 0341, para 22 h]<br />
Section 3(4) [p. 0341, para 22 i]<br />
Section 4 [p. 0328, para 5.1 e]<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
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b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(Dhanendra Kumar (Chairman), H.C. Gupta, P.N. Parashar, Dr. Geeta Gouri,<br />
Anurag Goel and M.L. Tayal (Members))<br />
0327<br />
Section 4(1) and 4(2)(a)(i) [p. 0328, para 3.3 b]<br />
Section 16 [p. 0342, para 22 b]<br />
Section 18 [p. 0339, para 22 b]<br />
Section 19 [p. 0327, para 1 e]<br />
Section 19(3) [p. 0335, para 13 g]<br />
Section 19(3)(a), (c) and (d) [p. 0329, para 5.7 e]<br />
Section 26 [p. 0342, para 22 c]<br />
Section 26(1) [p. 0328, para 14 c]<br />
Section 26(2) [p. 0342, para 22 d]<br />
Section 26(3) [p. 0326, para 22 d]<br />
Section 26(4) [p. 0342, para 22 d]<br />
Section 26(5) [p. 0342, para 22 e]<br />
Section 26(6) [p. 0342, para 22 e]<br />
Section 26(7) [p. 0342, para 22 c]<br />
Section 26(8) [p. 0342, para 22 e]<br />
Section 27 [p. 0331, para 22 c]<br />
Section 33 [p. 0336, para 13 f]<br />
Companies Act, 1956 [p. 0327, para 2.1 f]<br />
Consumer Protection Act, 1986 [p. 0348, para 22 d]<br />
Indian Evidence Act, 1872 [p. 0355, para 22 g]<br />
ORDER<br />
Dhanendra Kumar (Chairman), H.C. Gupta, P.N. Parashar, Dr. Geeta Gouri,<br />
Anurag Goel and M.L. Tayal (Members)<br />
1. The information in the present case has been filed by Yashoda Hospital and<br />
Research Centre Ltd. (hereinafter, referred to as “Informant”) under Section 19 of the<br />
Competition Act, 2002 (hereinafter, referred to as “the Act”) against the Indiabulls<br />
Financial Services Limited (hereinafter, referred to as “IFSL”) for its alleged<br />
anti-competitive activities.<br />
2. The facts as stated in the information, in brief, are as under:<br />
2.1 The IFSL is a company registered under the Companies Act, 1956 engaged in<br />
provision of financial services like consumer finance, housing finance, commercial<br />
loans, life insurance, asset management and advising services, etc. The Informant<br />
is a company registered under Companies Act, 1956 engaged in the business of<br />
running Super Specialty Hospitals and Research Institutions in India.<br />
2.2 A loan amount of Rs. 18,30,00,000 (Rupees eighteen crores thirty lacs only)<br />
against mortgage of property in Supertex Rameswar Complex on Plot No. 1,<br />
Kaushambi, Ghaziabad was taken by the informant from the IFSL with an agreed<br />
rate of interest @ 16 per cent per annum. The repayment schedule of the said loan<br />
was fixed on the basis of Equated Monthly Installment (EMI) through Post Dated<br />
Cheques (PDC)/Electronics Clearance System (ECS) in 120 months. Before expiry<br />
of the loan maturity date, the informant requested the IFSL to foreclose the loan<br />
account citing the reason of high interest rate. The IFSL agreed to foreclose the<br />
loan account on the condition that informant will pay foreclosure charges at the<br />
rate of 5.52 per cent on the outstanding principal and pre-payment penalty of<br />
Rs. 24,729. The request of the informant to waive the foreclosure charges and<br />
pre-payment penalty was turned down by IFSL.<br />
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3. The allegations of the Informant are:<br />
3.1 The IFSL is abusing its dominant position by demanding foreclosure charges<br />
at the rate of 5.52 per cent on the outstanding principal of the loan amount and<br />
pre-penalty of Rs. 24,729 for the unexpired period of loan.<br />
3.2 This act of IFSL is detrimental to competition amongst the banks in the mortgage<br />
loan market and also to the interest of the borrower as it prevents the borrower<br />
from switching over to other banks and other financial institutions who are offering<br />
lower rates of interest.<br />
3.3 The IFSL is not allowing the borrower to opt out without payment of foreclosure<br />
charges and pre-payment penalty. The above activities/practice of IFSL violates<br />
provisions of Sections 3(1), 3(2), 3(3) (a), 3(3) (b), 4(1) and, 4(2)(a)(i) of the Act.<br />
4. The Commission in its meeting held on 5 th April, 2010 considered the information<br />
submitted by informant and formed an opinion under Section 26(1) of the Act that,<br />
prima facie, there exists a case and referred the matter to the Director General<br />
(hereinafter referred to as “DG”) for investigation.<br />
Findings of the DG Report<br />
5. The DG submitted his investigation report to the Commission on 30 th July, 2010 in<br />
accordance with the provisions of Section 26(3) of the Act. The gist of the DG report<br />
is as follows:<br />
5.1 The issues identified in the DG for the purpose of investigation were as to<br />
whether the pre-payment penalty and foreclosure charges levied by IFSL on<br />
Informant on closure of the said loan account prior to the date of maturity are<br />
anti-competitive. If so, whether by levying foreclosure charges and pre-payment<br />
penalty IFSL has violated any of the provisions of Section 3 and/or Section 4 of<br />
the Act.<br />
5.2 DG has duly considered the information and reply submitted by the IFSL<br />
The information collected during investigation in a related Case No. 05/2009,<br />
from the Reserve Bank of India (RBI), various judgments of the Supreme Court of<br />
India, judgment of different consumer for a and prevalent international practices<br />
have been also taken into consideration to arrive at the conclusion in the matter.<br />
5.3 The DG has stated in the report that levying of pre-payment penalty and<br />
foreclosure charges is a widespread practice among banks and other financial<br />
institutions in India. These charges differ from institution to institution depending<br />
on their internal business policy. The DG has noted that during the course of<br />
investigation in Case No. 05/2009, majority of the banks and financial institutions<br />
had given the following rationale for levying of pre-payment penalty:<br />
(i) For better Asset Liability Management (hereinafter, referred to as “ALM”).<br />
(ii) To protect future interest earnings and to maintain interest spread.<br />
(iii) Recovery of the initial cost of sanction.<br />
(iv) Processing and maintaining the loan account.<br />
(v) To enhance fee based income.<br />
5.4 The DG has referred to guidelines issued by RBI in this respect wherein it is<br />
stated that banks and other housing finance companies are at liberty to impose<br />
pre-payment charges with the caveat that they should not be usurious. However,<br />
the DG has concluded that since RBI never recommended the plea of the banks<br />
and financial institutions that the pre-payment penalty and foreclosure charges<br />
are being imposed on account of ALM factor has no substance.<br />
a<br />
b<br />
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i<br />
2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(Dhanendra Kumar (Chairman), H.C. Gupta, P.N. Parashar, Dr. Geeta Gouri,<br />
Anurag Goel and M.L. Tayal (Members))<br />
0329<br />
5.5 The DG has also concluded that the foreclosure charges and pre-payment<br />
penalty by the banks and other financial institutions hinders free movement of<br />
borrowers from one bank/financial institution to another and act as a barrier to<br />
new entrants in the mortgage/housing/home loan market who are providing<br />
loans at a competitive interest rates and better services to the borrowers. Thus,<br />
levying of the foreclosure charges and pre payment penalty makes the exit<br />
expensive for the borrowers and resultantly acts as a deterrent in availing the<br />
lower competitive interest rates offered by other and financial institutions.<br />
5.6 On examination of the internal circulars/operating guidelines of the banks/<br />
financial institutions, DG has drawn the conclusion that the real motive behind<br />
levying prepayment penalty or foreclosure charges are:<br />
(i) To deter or limit competition among banks/financial institutions.<br />
(ii) To create a barrier for the existing customers who wish to switch over.<br />
(iii) To enhance their fee based income.<br />
5.7 It is submitted in the DG report that practice of levying of pre-payment penalty<br />
and foreclosure charges by the banks and financial institutions acts as an exit<br />
load which restricts or limits the borrower in availing the best market rate of<br />
interest which in turn impedes competition among the lending institutions, DG<br />
has further submitted that the existing borrowers have to incur additional cost in<br />
the form of pre-payment penalty and foreclosure charges which act as a deterrence<br />
in early repayment or refinancing of loan and thus is anti competitive and violates<br />
provisions of the Section 3(3)(b) read with Sections 19(3)(a), (c) and (d) of the Act.<br />
5.8 In order to investigate the allegations of the Informant under Section 4 of the<br />
Act in the matter, the DG delineated the relevant market as the market of mortgage/<br />
housing/home loans in India.<br />
5.9 The DG has noted that in the relevant market the share of IFSL is around<br />
4.88 per cent which shows that IFSL is not in a dominant position in the market<br />
of mortgage/housing/home loans. Hence, allegation of abuse of dominant<br />
position by IFSL under Sections 4(1), 4(2)(a)(i) of the Act does not stand<br />
substantiated.<br />
5.10 Lastly, the DG has came to the conclusion that by imposing pre-payment<br />
penalty and foreclosure charges on informant, the IFSL has violated Section 3(3)(b)<br />
of the Act. However, since IFSL is not in a dominant position in the relevant<br />
market, it has not contravened the provisions of Section 4 of the Act.<br />
6. The Commission considered the investigation report submitted by the DG on<br />
9 th November, 2010 and decided to send a copy of the investigation report to both the<br />
parties. The Commission also afforded an opportunity of oral hearing to IFSL.<br />
Shri Manohar Singh Sahi, Advocate appeared on behalf of the IFSL on<br />
21 st December, 2010 and requested the Commission for a copy of investigation report<br />
submitted by the DG in the Case No. 05/2009. The Commission allowed the request<br />
and directed the Secretary to supply a copy of the requisite report.<br />
Reply of IFSL<br />
7. The IFSL submitted its reply to the DG report on 18 th January, 2011. The gist of<br />
submissions made in the reply of IFSL is as under:<br />
7.1 In the Case No. 05/2009, the Commission has held that imposition penalty<br />
for pre-closure of home loans by banks and financial companies including<br />
Non-Banking Financial Companies (NBFC) does not violate any provision of<br />
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the Act. Therefore, the findings of the DG report in the present matter should be<br />
dismissed.<br />
7.2 DG investigation report does not have any evidence which even remotely<br />
suggests that the IFSL imposed pre-penalty charges in pursuance of any agreement<br />
with other banks or financial institutions. The DG has also not produced any<br />
evidence to establish that the IFSL was part of any agreement with other banks<br />
and financial institutions or with Indian Bank Association (IBA) relating to levy<br />
pre-payment charges.<br />
7.3 The IFSL has stated that there is healthy competition in the mortgage loans<br />
market. The interest rate charged by the banks and other financial institutions are<br />
decided by competitive forces of demand and supply in the market of mortgage<br />
loans implying, no individual bank or financial institutions have a say in deciding<br />
the rates of interest. Therefore, it is not possible on the part of an individual bank<br />
or financial institution to possess the economic strength to be considered as a<br />
dominant enterprise as per Section 4 of the Act. So, the question of abuse of<br />
dominance on the part of IFSL does not arise.<br />
Decision<br />
8. The Commission has carefully gone through the entire material submitted by the<br />
Informant, the submissions made by the IFSL before the DG, the Report of the DG,<br />
the submissions filed by the IFSL before the Commission and all other relevant<br />
materials and evidence available on record.<br />
8.1 It is noted that the IFSL is a company registered under the Companies Act, 1956<br />
and is engaged in provision of financial services like, consumer finance, housing<br />
finance, commercial loans, life insurance, asset management and advising services,<br />
etc. The activities being performed by the IFSL is covered in the definition of<br />
“enterprise” under Section 2(h) of the Act. In the present case, the service in question<br />
is the service of retail mortgage loan provided by IFSL to the Informant.<br />
8.2 From the facts of the case the issue which emerges for consideration before the<br />
Commission is whether by levying foreclosure charges and pre-payment penalty<br />
the IFSL has violated the provisions of Section 3 and/or Section 4 of the Act.<br />
8.3 Although the DG has drawn the conclusion in his report that the practice of<br />
imposing pre-payment penalty charges on borrower is anti-competitive and is hit<br />
by the provisions of Section 3(3)(b) of the Act but from the plain reading of the<br />
provisions of Section 3(3)(b), it is amply clear that for application of this provision<br />
there must be two or more enterprises engaged in identical or similar trade of goods<br />
or provision of services whereas, in the present matter the impugned practice of<br />
imposing foreclosure charges has been imputed to a single enterprise, i.e. IFSL. Even<br />
the DG has nowhere said in his report that IFSL was carrying on such practice in<br />
concert with any other enterprise engaged in similar business of providing loans<br />
against mortgage of property. Furthermore, there is absolutely nothing on record<br />
which can show that IFSL has been imposing pre-payment penalty and foreclosure<br />
charges in pursuance of some agreement entered into by it with any enterprise<br />
engaged in similar trade or business. For an agreement to exist there has to be an act<br />
in the nature of an arrangement, understanding or action in concert including<br />
existence of an identifiable practice or decision taken by an association of enterprises<br />
or persons. In the light of foregoing analysis, the commission is of the view that as<br />
the provisions of Section 3(3) cannot be made applicable in the instant matter the<br />
conclusion drawn by the DG is erroneous and cannot be accepted.<br />
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2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0331<br />
8.4 Even when the alleged conduct of IFSL of imposing pre-payment penalty or<br />
foreclosure charges is examined in the context of Section 4 of the Act it is noted<br />
that on taking into consideration 4.88 per cent market share of IFSL the DG has<br />
concluded that IFSL is not dominant in the relevant market and, therefore, it cannot<br />
be said to have violated any provisions of Section 4 of the Act. In the absence of<br />
any evidence to the contrary there is no reason to disagree with the conclusion<br />
drawn by the DG.<br />
9. Therefore, after analysing the entire material available on record the commission<br />
comes to the conclusion that no violation of either Section 3 or Section 4 of the Act is<br />
established against IFSL. In view of the above findings, the matter relating to this<br />
information is disposed of accordingly and the proceedings are closed forthwith.<br />
10. Secretary is directed to inform the parties accordingly.<br />
R. Prasad, (Member)—Dissenting Order<br />
Order under Section 27 of the Competition Act.<br />
11. The Informant in this case, i.e. Yashoda Hospital & Research Centre Ltd. filed a<br />
complaint that the recovery of the foreclosure charges on account of pre-payment of<br />
loan was anti-competitive and, therefore, the Commission should take action. It has<br />
been stated that foreclosure charges stop switching over of loans to other enterprises<br />
and this contravene the provisions 3(1), (2) and (3)(a) and (b) as well as 4(1), (2)(a)(i)<br />
of the Competition Act, 2002.<br />
12. The Informant is a company engaged in the business and running Hospitals &<br />
Research Institutions whereas the Respondent is another company engaged in<br />
financial activities such as consumer finance, housing finance and commercial<br />
loans etc. The Informant had a property in Kaushambi Ghaziabad and the said<br />
property was mortgaged to Syndicate Bank for the purpose of taking a loan.<br />
The second charge of the property was with the State Bank of India. The Informant<br />
switched the loan from Syndicate Bank to the Respondent Financial Company.<br />
The Informant mortgaged its property and took a loan of Rs. 1,83,000,000 (Eighteen<br />
crore and Thirty lacs only) w.e.f. 1 st April, 2008 payable in 120 installments. The<br />
Informant had also paid a processing fee of Rs. 3,084,282 (Rs. Thirty lacs eighty<br />
Four Thousand Two Hundred Eighty Two only) to the Respondent and the EMI<br />
was fixed at Rs. 2,997,417. The State Bank of India had given no objection certificate<br />
to the Respondent company for the transfer of the first charge on the property.<br />
The Informant found the interest rate very high and it wanted to foreclose the loan.<br />
A foreclosure charges Rs. 9,644,281 was levied by the Respondent company. This<br />
action of Respondent company in the opinion of Informant was anti-competitive as<br />
switching from one company to another company was not allowed and, therefore,<br />
in the opinion of the Informant company the provisions of Sections 3 and 4 from the<br />
Competition Act were contravened.<br />
13. Along with the facts of the case, the Informant company has submitted arguments<br />
why the entire transaction was anti-competitive.<br />
The concept of pre-payment charges (The Foreclosure Charges)<br />
What Does Prepayment Penalty Mean?<br />
A Clause in a mortgage contract that says if the mortgage is prepaid within a<br />
certain time period, a penalty will be levied. The penalty is usually based on<br />
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percentage of the remaining mortgage balance or a certain number of months<br />
worth of interest.<br />
A pre-payment penalty that applies to both the sale of a home and a refinancing<br />
transaction is called a “hard” pre-payment penalty. A pre-payment penalty that<br />
applies to refinancing only is called a “soft” pre-payment penalty.<br />
Investopedia explains Prepayment Penalty<br />
Lenders write pre-payment penalties into mortgage contracts to compensate for<br />
pre-payment risk. As the incentive for a borrower to refinance a subprime mortgage<br />
is high, many subprime mortgages have pre-payment penalties.<br />
A borrower should be aware of the risks associated with a pre-payment penalty.<br />
A pre-payment penalty can substantially increase the cost of refinancing a<br />
mortgage when it would otherwise be economical.<br />
Provision in some loan agreements under which a borrower may pay off (retire) a<br />
loan ahead of the schedule, without incurring pre-payment penalty.<br />
What is pre-payment? Why and when do people opt for it?<br />
It’s just what the name implies: prepaying all or part of the loan amount before it<br />
is actually due. However, it is more complicated than it sounds! First, you will<br />
have to check your retail loan documents to find out if pre-payment is allowed<br />
and the percentage of outstanding loan amount that you will be paying towards<br />
pre-payment penalty charges, if any.<br />
You might want to prepay your loan for simple reasons. That, you could save on<br />
the net interest payable as longer loan tenure means more interest paid.<br />
Why do banks charge penalty for pre-payment?<br />
Well, banks and lenders lend money in the form of loans only to make money out<br />
of service fees and interest. And this requires the loan to be open for a fairly longer<br />
duration to give profits. They cannot stop your legal right from making a<br />
pre-payment. But at the same time pre-payment would mean upsetting their profit<br />
calculations from interests. Hence, the banks and lenders impose a pre-payment<br />
penalty to compensate a portion of the lost profit. Usually, your loan agreement<br />
would have a Clause defining your obligations and interest in case of pre-payment<br />
in part or in full.<br />
RBI’s current stand on this penalty<br />
The Reserve Bank of India (RBI) has hinted at drafting a policy to restrict banks<br />
from imposing pre-payment penalty.<br />
The proposed move follows many such complaints from loan borrowers paying<br />
EMIs based on the floating rate of interest. They feel that they are missing out on<br />
the benefits of periodical rate cuts in interest.<br />
Pre-payment penalties by different banks in India<br />
Public sector banks charge 1 to 1.5 per cent as pre-payment penalty on outstanding<br />
loan amount and in the case of private banks it is between 2 and 4 per cent and in<br />
our case it is @ of 5.52 per cent.<br />
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Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0333<br />
a<br />
b<br />
c<br />
d<br />
S. No. Name of Banks Prepayment penalty<br />
charged by the Bank<br />
1. Indian Overseas Bank (IOB) 1%<br />
2. Punjab National Bank (PNB) 2%<br />
3. Corporation Bank 1%-2%<br />
4. ICICI Bank Ltd. 2%<br />
5. Allahabad Bank 2%<br />
6. Vijaya Bank 1% - 2%<br />
7. Oriental Bank of Commerce (OBC) 1%<br />
8. Canara Bank 2%<br />
9. Punjab & Sind Bank 0.5% - 2%<br />
10. State Bank of Hyderabad 2%<br />
11. State Bank of India 2%<br />
12. LIC Housing Finance 1% - 2%<br />
13. Deutsche Post Bank 3%<br />
14. HDFC Bank 3 - 6%<br />
15. Indian Bank 2.25%<br />
16. India Bulls 5.52%<br />
e<br />
f<br />
g<br />
h<br />
i<br />
How the idea was developed?<br />
As an illustrated example let us consider the following situation.<br />
The pre-payment is charged by loan institution if borrower returns the money<br />
borrowed before the stipulated tenure of loan.<br />
If “A” avails of a loan of Rs. 100 from a bank or any Financial Institution, and<br />
schedule of repaying the entire sum is over a period of 10 years with equated<br />
monthly instalments (EMIs) of Rs. 2 per month and after the schedule of EMIs<br />
for two years, “A” wants to close the loan account and approaches the bank to<br />
accept the balance amount and close the account. The bank, if accepts is allowed<br />
to recover the outstanding loan amount, interest and an additional amount of<br />
1 per cent of outstanding amount inclusive of interest as pre-payment charges.<br />
Therefore, a customer is allowed to migrate to a lower cost source of fund or<br />
return the loan before due date only after he pays this exit load created by bank or<br />
financial institution on borrower (Principal amount as on that date plus interest<br />
or loss of interest).<br />
Thus, with downward change in the interest rates, the borrower is not free to<br />
switchover to another bank or financial institution offering a lower rate of interest.<br />
The Bank has by this killed the competition, retained the customer and future<br />
profits. In other words it can be said that pre-payment and foreclosure penalties<br />
are the mouse traps set by the banks and financial institutions to which borrower<br />
is bound to fall prey by this pre-payment Clause.<br />
How the practice is anti-competitive violative of Section 3 and Section 4 of<br />
the Act?<br />
That the main issue is pre-payment penalty which is levied by various banks/<br />
financial institutions on the borrowers on the outstanding loan amount paid<br />
before the maturity date/schedule of the loan practice of charging pre-payment<br />
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penalty on early returns of loans—home loans or other loans—is anti-competitive<br />
in terms of Section 3(3) of the Competition Act, 2002 and results in appreciable<br />
adverse effect on competition in India.<br />
Issues involved<br />
• Issues related to Asset Liability Managements.<br />
• Prepayment penalty and Reserve bank of India (RBI).<br />
• Legal status of the pre-payment penalty issue.<br />
What are the arguments in support of the gross concept at present and when it<br />
was started?<br />
• For a better Asset Liability Management (ALM).<br />
• The re-financing bank also charges the pre-payment levy.<br />
• Fair Practice Guidelines of Reserve Bank of India permit freedom to levy service<br />
charges. Annexed herewith as Annexure C/7 colly.<br />
• It is transparent Customer knows before signing of the agreement that he has<br />
to pay pre-payment penalty.<br />
What is the law or regulatory status?<br />
• Origin of this practice is traced to the home finance companies somewhere<br />
around 1993 or so to discourage migration of customer to other lenders.<br />
• The correct justification is to kill completion, prevent migration of customer to<br />
other banks and enhance fee based income.<br />
• RBI is the regulatory body. It has issued general guidelines which discourage<br />
such practices.<br />
• However, there is no enforcement of this direction and banks have been left<br />
free to charge different service charges within the broad parameters of regulatory<br />
guidelines issued by RBI. Thus, these are simply holy homilies without any<br />
impact.<br />
• In one case where pre-payment penalty was charged, it has been upheld as<br />
wrong in the case of State Bank of India.<br />
• International practice is, broadly, in favour of not having any exit load on the<br />
borrower whether called by early redemption charge, pre-payment penalty or<br />
any other name.<br />
• As regards the violations under the Competition Act, 2002, it may be stated<br />
that the origin of this practice are rooted in preventing the customer from<br />
trying to get better bargain, disciplining the borrower and kill competition.<br />
• In a way this, practice limits/controls supply of funds in the loan market and,<br />
therefore, falls within the provisions of Section 3(3) of Competition Act, 2002.<br />
What is the Legal position?<br />
Mrs. Usha Vaid & Ms. Shilpa Vaid v. State Bank of India<br />
Whether this clause is to be enforced in the present case or not is the question<br />
before us. In a similar case the Hon’ble State Commission has held that this<br />
2 per cent pre-payment charges could not be levied on the basis of a circular<br />
issued by the Bank. The learned Counsel for the OP. had argued that these charges<br />
are not imposed in the present case on the basis of the contract entered into<br />
between the parties and therefore, it will not be covered by the aforesaid decision<br />
of the Hon’ble State Commission. However, we do not find any force in this<br />
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Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0335<br />
contention of the OP as pre-payment charges on 10 th March, 2005 to the<br />
Complainant. The OP shall also pay a sum of Rs. 1,000 as compensation for the<br />
harassment and mental agony and also Rs. 500 as cost of litigation to the<br />
Complainant.<br />
Any consumer availing such a loan always avails service of those which charges<br />
lesser rate and if he is not aware of the lesser rate being charged by particular<br />
bank and avail the service of government bank which normally and ordinarily is<br />
supposed to charge not more than what the private banks are charging and if at<br />
later stage he finds that government banks is charging much higher rate of interest<br />
he would naturally make request for transfer of the loan amount and, therefore,<br />
such a request cannot come within the ambit of terminology of “pre-payment” as<br />
it has to be deemed a case of “takeover”. “No bank or for that purpose finance<br />
companies can be allowed to indulge in restrictive trade practice by binding the<br />
consumer to go on availing loan even if rate of interest charged by the said bank<br />
is much higher than the other banks and any such Clause which operates<br />
adversely to the consumer like Clause 4 has to be held as void and, therefore, not<br />
enforceable.”<br />
Jurisdiction of Competition of India<br />
3(3) Any agreement entered into between enterprises or associations of enterprises<br />
or persons or associations of persons between any person and enterprise or<br />
practice carried on, or decision taken by, any association of enterprises or<br />
association of persons, including cartels, engaged in identical or similar trade of<br />
goods or provision of services, which:<br />
(a) Directly or indirectly determines purchase or sale prices;<br />
(b) Limits or controls production, supply, markets, technical development,<br />
investment or provision of services;<br />
(c) Shares the market or source of production or provision of services by<br />
way of allocation of geographical area of market, or type of goods or<br />
services, or number of customers in the market or any other similar way;<br />
(d) Directly or indirectly results in bid rigging or collusive bidding shall be<br />
presumed to have an appreciable adverse effect on competition<br />
Provided that nothing contained in this sub-section shall apply to any<br />
agreement entered into by way of joint ventures if such agreement increases<br />
efficiency in production, supply, distribution, storage, acquisition or control<br />
of goods or provision of services.....<br />
In context to Section 19(3) of the Competition Act, 2002:<br />
Levying of pre-payment penalty creates a barriers to new entrants in the market<br />
in way that if the new entrants is providing competitive interest rates, better<br />
services etc. The borrower of the existing bank can only avail the services of the<br />
new entrant by incurring additional costs in the form of pre-payment charges.<br />
Levying of pre-payment penalty by banks creates an exit load thus, acts as a<br />
deterrent for a borrower in availing the best prevailing interest rates of other<br />
banks/financial institutions.<br />
Section 19(3) the Commission shall, while determining whether an agreement<br />
has an appreciable adverse effect on competition under Section 3, have due regard<br />
to all or any of the following factors, namely:<br />
(a) Creation of barriers to new entrants in the market;<br />
(b) Driving existing competitors out of the market;<br />
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(c)<br />
(d)<br />
(e)<br />
(f)<br />
Foreclosure of competition by hindering entry into the market;<br />
Accrual of benefits to consumers;<br />
Improvements in production or distribution of goods or provision of<br />
services;<br />
Promotion of technical, scientific and economic development by means<br />
of production or distribution of goods or provision of services.<br />
Conclusion on the pre-payment penalty:<br />
(1) Levying of pre-payment penalty is a widespread practice among banks and<br />
the financial institutions in India.<br />
(2) It is noted that some of the banks have differential policy with regard to the<br />
levying of pre-payment penalty i.e.<br />
(3) When the pre-payment was done by the borrower to the banks from its own<br />
account/sources no pre-payment charges/penalty is levied by the banks.<br />
(4) However, when the borrowers makes the pre-payment of funds by<br />
refinancing or take over/switch over by another banks/financial<br />
institutions pre-payment charges are levied by the banks.<br />
(5) However, some of the banks/financial institutions charge pre-payment<br />
penalty irrespective of the source of funds, i.e. own funds or take over/<br />
switch over or refinancing by other bank/financial institution.<br />
(6) The option of pre-payment lies with the borrower and the banks are not<br />
aware in advance of the time of pre-payment.<br />
(7) Likewise, the borrower in most of the cases does not know the exact amount<br />
(only a range) which is to be levied on the outstanding loan amount and its<br />
computation includes several other parameters administrative cost, credit<br />
history, prevailing interest rates etc.<br />
Relief Sought:<br />
In the facts and circumstances mentioned above, it is, therefore, most humbly<br />
prayed that this Hon’ble Commission may be pleased to:<br />
(a) Pass an ad interim ex parte order under Section 33 of the Act, temporarily<br />
restraining the IFSL from recovering arbitral and prejudicial foreclosure<br />
charges to the tune of 5.52 per cent of the outstanding principal of the<br />
loan/the interest outstanding for the unexpired period of the loan and<br />
pre-payment penalty of INR 24,729.00<br />
(b) Direct the IFSL not to arbitrarily and prejudicially enter into such<br />
preferential practices which are detrimental to the competition amongst<br />
the banks and also to the interest of the borrower who is prevented from<br />
switching over to other enterprises which is offering a lower rate of<br />
interest.<br />
(c) Direct the IFSL to delete or amend the foreclosure Clause/provisions<br />
mentioned above, as the same are arbitrary, unjust and dominating<br />
Clauses.<br />
(d) Direct the IFSL to compensate the YHRCL for losses accrued on account<br />
of arbitrary and unjust application of such arbitral and prejudicial<br />
foreclosure charges.<br />
(e) Direct the IFSL to withdraw the letter dated 25 th November, 2009 which<br />
arbitrarily and unilaterally levies payment of such arbitral and prejudicial<br />
foreclosure charges to the tune of 5.52 per cent.<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
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Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0337<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
(f) Restrict the banks and other financial companies from indulging into<br />
such restrictive trade practice by binding the consumer to go on availing<br />
loan even if rate of interest charged by the said bank is much higher than<br />
the other banks and any such Clause which operates adversely to the<br />
consumer has to be held as void and, therefore, not enforceable.<br />
(g) Pass any other order(s)/Directions(s) deemed just, fit and proper in the<br />
interest of justice, equity and fair play.<br />
14. The Commission considered the facts of the case and the arguments of the<br />
Informant and referred the case for investigation under Section 26(1) of the<br />
Competition Act to the D.G. The D.G. gave an opportunity to India Bulls Financial<br />
Services Ltd., i.e. the Respondent. India Bulls stated that before taking the loan the<br />
Informant was aware that the pre-payment penalty for the foreclosure of loans had<br />
got to be paid. It was also stated that the interest rate was in accordance with the RBI<br />
guidelines. It was also argued that India Bulls did not levy anything in excess all the<br />
charges stipulated in the loan agreement. On the other hand, the Informant relied on<br />
the arguments which were enclosed mentioned with the information.<br />
15. The D.G. considered all these facts. He examined the issue of pre-payment and<br />
the levy of penalty for the foreclosure of loans. DG agreed that the recovery of<br />
pre-payment fees for the foreclosure of the loan was in accordance with the agreement<br />
entered into by the Informant with India Bulls. But the DG held that the levy of the<br />
penalty stops the borrower to switch over to another financial institutions which<br />
has offered a lower rate of interest and acts as an exit barrier and restricts the borrower<br />
in availing the opportunity of declining interest rate. He, therefore, held that this<br />
was a violation of the Section 3(3)(b) of the Competition Act, 2002. In the opinion of<br />
the DG the levy of pre-payment penalty was unjust and unfair trade practices and<br />
that it stops switching of the borrower from one bank to another. He, therefore,<br />
found an infringement of Sections 3(3)(b) of the Competition Act, 2002. As far as<br />
Section 4(1), (2)(a)(i) of the Competition Act, 2002 is concerned, the D.G. defined the<br />
relevant product market and relevant geographical market. But he found that India<br />
Bulls did not have a dominant position as it had a market share in the mortgage loan<br />
market of only 4.88 per cent. In his view the provisions of Section 4(1), (2)(a)(i) were<br />
not attracted. But the D.G. has also mentioned that this case should be clubbed with<br />
the case No. 5/2009 where a similar issue in the case of 15-16 Banks was discussed.<br />
16. After the receipt of Director General’s report, a hearing was given to India Bulls<br />
and the Informant. The Informant did not appear and was not willing to pursue its<br />
case as the penalty recovered by India Bulls had already been refunded to it.<br />
17. As far as India Bulls is concerned, arguments were advanced that there was no<br />
violation of the provisions of the Competition Act.<br />
It was argued on behalf of India Bulls that the findings of the DG were incorrect in<br />
view of decision of the Commission in case of Neeraj Malhotra v. Deutsche Bank and Ors.<br />
It was, therefore, stated that the complaint should be dismissed. It was also argued<br />
that as India Bulls had a market share only 4.88 per cent, it was not a dominant<br />
player and for this reasons Sections 4(1), 4(2)(a)(i) of the Competition Act are not<br />
applicable. As far as Section 3(3)(b) is concerned it was argued that there was no<br />
material to hold that India Bulls had coordinated with other Banks and Home<br />
Finance Companies in respect of pre-payment penalty on the foreclosure of the<br />
loans. The argument of Asset Liability Management was also raised. The Asset<br />
Liability Management and Fair Practices Code in accordance with RBI guidelines<br />
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were also argued. It was also stated that the case of Dr. (Mrs.) Usha Vaid and Ors. was<br />
not applicable to the facts of the Respondent case. On the other hand reliance was<br />
placed on the ratio laid down in the case of Hotel Vrinda Prakash v. Karnataka State<br />
Financial Corporation and TT Ltd. v. IFCI Ltd. In these two cases the High Courts had<br />
upheld the levy of penalty for the foreclosure of the loans. It was further stated that<br />
the DG had placed reliance on the examples of USA and Taiwan markets. It was<br />
stated that the sanctity of the contract should be preserved and that when a person<br />
knowingly enters into a contract for the levy of the penalty then the Competition Act<br />
cannot be invoked. It was further stated that the International practices favour the<br />
charging of pre-payment penalties. It was also argued the findings of the DG that<br />
the levy of the pre-payment penalty creates barriers for the new entrants in the<br />
market was totally incorrect as in India in the home loan market 1,000 NBFC/HFCs<br />
are operating. It was further argued that the findings of the DG based on<br />
Section 19(3)(d) of the Act were based on conjectures and surmises. It was stated<br />
that the foreclosure charges of Rs. 9,944,282 paid by the Informant had already been<br />
refunded by the Respondent vide a settlement on 10 th June, 2010. It was, therefore,<br />
stated the DG report is baseless and, therefore, the case should be closed.<br />
18. Another view can be held that in this case that as this case is an individual case<br />
and no class action was involved, there is no case under the competition Law. There<br />
is no doubt that it is a case of a single Complainant against a particular bank but<br />
according to the D.G. and the Respondent the issue is the same as that in the case of<br />
Neeraj Malhotra. I, therefore, agree that it is a single case but the issues involved here<br />
are one which is prevalent in the entire banking industry and is, therefore, the case<br />
is one of class action.<br />
19. In this connection it is necessary to examine the concept of “after market abuse”<br />
as explained by the U.S. Supreme Court in the case of Eastman Kodak Co. v. Image<br />
Tech. SVCS504 U.S. 451(1992). In this case, Kodak was the seller of photocopying<br />
machines. In the market of photocopying machines Kodak was not a dominant<br />
player. As far as the services and the repair market for the photocopiers was<br />
concerned, Kodak was initially selling the spares to various dealers who used to<br />
service the photocopiers and use the spares supplied by Kodak. Kodak found that<br />
some of these service dealers started developing their own spares to service the<br />
photocopiers and some of them used to give better service than Kodak themselves.<br />
Kodak, therefore, changed its business model and asked the equipment<br />
manufacturers to supply the equipment to it only. Kodak then used to sell the spares<br />
to those buyers of Kodak photocopiers who could service them themselves or used<br />
to service the photocopiers with spares in its own premises. In this manner, Kodak<br />
has had 100 per cent control over the entire spares and around 85 per cent of the<br />
service itself. Thus, many of the earlier Kodak dealers who used to service the Kodak<br />
photocopiers were driven out of business. These dealers filed an antitrust case against<br />
Kodak. The District Court ruled in favour of Kodak the dealers took the case in<br />
appeal to the Court of appeals for the Ninth Circuit. The Court of appeals held that<br />
Kodak’s approach was anticompetitive, exclusionary and involved a specific intent<br />
to monopolise. Aggrieved against the judgment of the Court of appeals Kodak went<br />
to the Supreme Court of the USA.<br />
20. The Supreme Court considered the facts of the case. In the opinion of the Supreme<br />
Court there were two markets, i.e. a market of photocopiers where Kodak was not a<br />
significant player. The second market was described by the Supreme Court as an<br />
aftermarket and consisted of service after sales. In this after market, there was a tie in<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
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Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0339<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
scenario as spares would be given with the service. The Supreme Court then relied<br />
on its own decisions on market power. In the case of Jefferson Parish 466 US at 14.9,<br />
Supreme Court had held that market power is power “to force a purchaser to do<br />
something that he would not do in a competitive market”. In another case U.S. v. E.I.<br />
du Point de Nemours & Co. 351 U.S. 377, 391(1956), the Supreme Court had defined<br />
market power as “the ability of a single seller to raise price and restrict output”. The<br />
existence of such power is ordinarily inferred from the seller’s possession of a<br />
predominant share in the market Jeffer Parish 466 US 17.1.<br />
The Supreme Court then held that in the aftermarket Kodak enjoyed monopoly<br />
power. The Supreme Court also held that a customer is “locked in” after the purchase<br />
of the equipment as the switching costs are high. The customer can then be subjected<br />
to abuse. The Supreme Court also held that it is a question of fact as to whether<br />
information costs and switching costs and switching costs foil the assumption that<br />
the equipment and service market act as a pure complement to each other. On these<br />
facts, the Supreme Court held that the behaviour of Kodak was anti-competitive.<br />
21. In this case, there were two markets. The first market is the one where the<br />
Informant wanted to switch his loan from syndicate Bank to India Bulls, the<br />
Respondent. At this juncture, the Informant had the choice of shifting to any other<br />
bank other than the Respondent. But when the Informant took the loan from the<br />
Respondent, he entered into an agreement where he agreed to pay penalty for the<br />
foreclosure of the loan. The penalty became the switching cost. The second market is<br />
the loan recovery market where the only monopolist was the Respondent. Due to the<br />
high switching costs, the Informant became a captured client which could be<br />
discriminated against and abused. I agree with the DG that in the first market of the<br />
loan market, the Respondent did not have a large share and was therefore, not<br />
dominant. But in the second market, i.e. the after market or the relevant market in the<br />
geographical territory of India, it was a monopolist and exercised full control over<br />
the Informant. The high switching cost is an example of the abuse for the purposes<br />
of Section 4(1) of the Act.<br />
22. Incidentally, in the case of Neeraj Malhotra (supra) I had given a dissenting<br />
judgment. Extract of my order is reproduced as under as they are relevant in this<br />
case: (Page 13 to 43):<br />
(14) After discussing the facts of the case, it is necessary to examine the provisions<br />
of the Competition Act. The preamble to the Act talks about:<br />
(i) Establishment of a Commission to prevent practices having adverse effect<br />
on competition.<br />
(ii) To promote and sustain competition in markets.<br />
(iii) To protect the interests of consumers.<br />
(iv) To ensure freedom of trade carried on by the other participants in markets<br />
in India<br />
(v) Matters connected therewith or incidental thereto.<br />
(15) Section 18 of the Competition Act defines the duty of the Commission which are:<br />
(i) to eliminate practices having an adverse effect on competition.<br />
(ii) Promote and sustain competition<br />
(iii) Protect the interests of consumers<br />
(iv) Ensure freedom of trade carried on by the other participants in markets<br />
in India<br />
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(16) Competition itself has not been defined in the Act. The reason could be that<br />
by defining Competition the meaning of Competition is restricted. Therefore,<br />
competition has to be given a wide meaning. The purpose of competition is the<br />
economic development of the country. Competition leads to higher productivity<br />
innovation, cheaper prices, freedom of choice and decreasing switching costs.<br />
Therefore, practices which lead to decrease in productivity, innovation, higher<br />
prices, decrease of the freedom of choice and increasing switching costs may be<br />
classified as anti-competitive or causing adverse effect on competition. It is the<br />
duty of the Commission to ensure freedom of trade, eliminate anti-competitive<br />
practices, promote and sustain competition and protect the interests of the<br />
consumers.<br />
(17) Section 3 of the Competition Act is reproduced and is as follows:<br />
Anti-competitive agreements<br />
(1) No enterprise or association of enterprise or person or association of<br />
persons shall enter into any agreement in respect of production, supply,<br />
distribution, storage, acquisition or control of goods or provision of<br />
services, which causes or is likely to cause an appreciable adverse effect<br />
on competition within India.<br />
(2) Any agreement entered into in contravention of the provisions contained<br />
in Sub-section (1) shall be void.<br />
(3) Any agreement entered into between enterprises or associations of<br />
enterprises or persons or association of persons or between any person<br />
and enterprise or practice carried on, or decision taken by, any association<br />
of enterprises or association of persons, including cartels, engaged in<br />
identical or similar trade of goods or provision of services, which:<br />
(a) directly or indirectly determines purchase or sale prices;<br />
(b) limits or controls production, supply, markets, technical<br />
development, investment or provision of services;<br />
(c) shares the market or source of production or provision of services<br />
by way of allocation of geographical area of market, or type of goods<br />
or services, or number of customers in the market or any other<br />
similar way;<br />
(d) directly or indirectly results in bid rigging or collusive bidding.<br />
Shall be presumed to have an appreciable adverse effect on<br />
competition:<br />
Provided that nothing contained in this Sub-section shall apply<br />
to any agreement entered into by way of joint ventures if such<br />
agreement increases efficiency in production, supply,<br />
distribution, storage, acquisition or control of goods or provision<br />
of services.<br />
Explanation - For the purposes of this Sub-section, “bid rigging”<br />
means any agreement, between enterprises or persons referred<br />
to in Sub-section (3) engaged in identical or similar production<br />
or trading of goods or provision of services, which has the effect<br />
of eliminating or reducing competition for bids or adversely<br />
affecting or manipulating the process for bidding.<br />
(4) Any agreement amongst enterprises or persons at different stages or levels<br />
of the production chain in different markets, in respect of production,<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
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b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0341<br />
supply, distribution, storage, sale or price of, or trade in goods or provision<br />
of services, including:<br />
(a) tie-in arrangement;<br />
(b) exclusive supply agreement;<br />
(c) exclusive distribution agreement;<br />
(d) refusal to deal;<br />
(e) resale price maintenance shall be an agreement in contravention of<br />
Sub-section (1) if such agreement causes or is likely to cause an<br />
appreciable adverse effect on competition in India.<br />
Explanation - For the purposes of this sub-section:<br />
(a) “tie-in arrangement” includes any agreement requiring a<br />
purchaser of goods, as a condition of such purchase, to purchase<br />
some other goods;<br />
(b) “exclusive supply agreement” includes any agreement restricting<br />
in any manner the purchaser in the course of his trade from<br />
acquiring or otherwise dealing in any goods other than those of<br />
the seller or any other person;<br />
(c) “exclusive distribution agreement” includes any agreement to<br />
limit, restrict or withhold the output or supply of any goods or<br />
allocate any area or market for the disposal or sale of the goods;<br />
(d) “refusal to deal” includes any agreement which restricts, or is likely<br />
to restrict, by any method the persons or classes of persons to whom<br />
goods are sold or from whom goods are bought;<br />
(e) “resale price maintenance” includes any agreement to sell goods<br />
on condition that the prices to be charged on the resale by the<br />
purchaser shall be the prices stipulated by the seller unless it is<br />
clearly stated that prices lower than those prices may be charged.<br />
The Section consists of various parts. Sub Section (1) of Section 3 has wide<br />
ramifications. An agreement which causes appreciable adverse effect on<br />
competition in India in respect of production, supply, acquisition, control of<br />
goods and services is void as stated in Sub-section (2) of Section 3 of the Act.<br />
Sections 3(1) and 3(2) do not deal only with the supply side of the market.<br />
A market works on the principle of demand and supply. The assumption here<br />
is that a consumer would make a decision to purchase or sell in a rational<br />
manner so as to maximise gains to it. If an enterprise deals with an individual<br />
by entering into an agreement which causes an adverse effect to competition in<br />
India would be hit by Sections 3(1) and 3(2) of the Act. Any other view would<br />
be a narrow view and not authorised by the Act.<br />
Section 3(3) of the Act is based on the concept of presumption. It is envisaged<br />
that if the factors as enumerated Clauses (a), (b), (c) and (d) of Sections 3(3)<br />
exist then it would be presumed that there is an appreciable adverse effect on<br />
competition. No presumption is absolute as presumption can be rebutted. In<br />
the main Section 3(3) of the Act, the behaviour of the persons or enterprises<br />
which are covered are agreements, practices carried on and decisions taken.<br />
Another aspect to be looked into is that the enterprises are engaged in similar<br />
trade of goods or provision of services.<br />
Section 3(4) talks of an agreement between persons in a production chain in<br />
different markets in respect of production, supply, distribution, storage, sale<br />
or price of or trade in goods or provision of services. The Section has an inclusive<br />
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definition which includes tie-in arrangement, exclusive supply agreement,<br />
refusal to deal, exclusive distribution agreement and resale price maintenance.<br />
These five situations are not exhaustive and could include other situations.<br />
In any case exclusive supply agreement means an agreement which restricts<br />
the customer from buying goods or services from any other buyer. Only issue<br />
to be examined in Section 3(4) is whether on the facts and circumstances of the<br />
case there is an adverse effect on competition.<br />
(18) The next salient feature to be seen as to how the Act should operate. Under<br />
Section 16 of the Act, it is the duty of the Director General to assist the Commission<br />
to fulfill its obligation under Section 18 of the Act. It is not for the Commission to<br />
sit on judgment over the findings of the DG. If the DG has not carried out proper<br />
investigation, the Commission can direct the DG to investigate the case on the<br />
issues to be directed by the DG. It can inquire itself also. This is the scheme under<br />
Section 26(7) of the Act.<br />
(19) The procedure for inquiry has been laid down in Section 26 of the<br />
Competition Act. On the basis of own information or from any other source, the<br />
Commission can form an opinion that prima facie case exists it can direct the DG<br />
to carry out an investigation under the Competition Act (Section 26(1) of the Act).<br />
If on the basis of information, the Commission forms a prima facie opinion that no<br />
case exists, it can close the case (Section 26(2)). An appeal to the COMPAT lies<br />
against the Commission. Under Section 26(3) of the Act, the D.G. is required to<br />
submit his report to the Commission within the period specified. Under<br />
Section 26(4), the report of the DG is required to be forwarded to the parties<br />
concerned. Section 26(5) envisages a situation where the DG has not found a<br />
contravention of the Act. In such a case, the Commission is required to give a<br />
notice to all the parties and hear them. Under Section 26(6) of the Act, if the<br />
Commission agrees with the findings of the DG, it can close the case by passing<br />
an order. This order under Section 26(6) is appealable. Section 26(8) talks of a<br />
situation where DG has found a contravention of the Act but the Commission<br />
finds that more enquiries are needed, it can carry out enquiries. No order dropping<br />
the case or penalizing the concerned parties can be passed under Section 26(8) of<br />
the Act because the Section does not talk of an order as has been mentioned in<br />
Sections 26(2) and 26(6) of the Act. It is implied in the Act when the Commission<br />
has formed a prima facie opinion under Section 26(1) of the Act and the D.G. has<br />
confirmed this prima facie view by investigation, the Commission cannot drop the<br />
proceedings. If it drops the proceedings it amounts to a recall of its orders passed<br />
under Section 26(1) of the Act. Further, the legislative intent is clear. As discussed<br />
earlier, no order under Section 26(8) can be passed. If the intention of the legislature<br />
was to drop proceeding under Section 26(8) then it should have mentioned that<br />
an order was required to be passed and the said order would have been appealable.<br />
In such a case, the Commission has to accept the recommendations of the<br />
DG though it has discretion to levy penalty of different types under Section 27 of<br />
the Act.<br />
(20) We also have to examine the economic considerations for the levy of penalty<br />
charged by the banks for the foreclosure of loans. We have to examine the<br />
economies of treatment of this phenomena of penalty for the foreclosure of loans<br />
in other countries. We also have to examine the home loan market in India and its<br />
contribution to the Indian economy and vice versa. We also have to examine<br />
whether the banks/financial companies are losers or gainers if their customers<br />
prepay their loans.<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
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f<br />
g<br />
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i<br />
2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0343<br />
(25) An economy would grow in the short run if consumer spending increases. If<br />
consumer spending increases the savings rate would go down. Savings rate<br />
increase in the long run may be beneficial but consumption spending in the short<br />
run is beneficial for the economy. Thus it is necessary to put surplus cash in the<br />
hands of the consumers. But the banks by having a pre-payment fine on the<br />
consumers is decreasing the cash availability. Further, a cap has been put on the<br />
banks and other companies as far as housing loan is concerned. If a fillip is given<br />
to housing by having cheap property prices and cheap loans, the housing industry<br />
would receive a boost. This in turn would lead to higher employment, higher<br />
industrial growth, higher growth of person income and increase of G.D.P.<br />
(26) It is, therefore, necessary that as India faces shortage of houses, the home<br />
loan market should be expanded. Mobility in the market for the customer should<br />
be encouraged. Competition in home loan banking is important in order to ensure<br />
an efficient banking industry and should not be viewed as dangerous to the<br />
banking sector. In fact, in Norway mortgages are the main source of income for<br />
customers constituting 75 per cent of the total income. In India as well as in<br />
various countries, the banks charge customers for terminating services.<br />
This reduces the mobility of customers. The ability of the customers to switch<br />
banks helps the competitors the benefits of a competitive banking market. Any<br />
obstacle which reduces customers’ ability to switch banks will correspondingly<br />
reduce the competitive pressure on banks. High switching cost may result in<br />
increased bank market power and enable the banks to extract extra rent from the<br />
customers. High switching costs may also constitute barriers to entry as they<br />
make it harder for new entrants to attract customers and hence discourage new<br />
market entry. Further high switching cost may discourage product innovation,<br />
as customers would be reluctant to switch to new products and services.<br />
(27) The European Commission carried out a study of retail banking. Even the<br />
EFTA Authority had carried out a study of retail banking in the EFTA countries.<br />
The European Commission found potential competition concerns and consumer<br />
harm in some of the areas such as list of coordinated behaviour in the banks to the<br />
detriment of customer mobility through a non-transparent treatment of certain<br />
products such as mortgages. There are some economists who consider that banks<br />
form a big cartel but most of the economists are not of this view. The European<br />
Commission observed that the mortgages generated largest share of income in<br />
retail banking in European banks. It has also been stated in the said report that<br />
before customers change banks he considers all the factors which help him in<br />
switching banks. This would include switching costs also. It was also observed<br />
by the Commission that switching costs in the retail bank industry has three<br />
significant effects, (i) it increases the bank market power and this leads the bank<br />
to discriminate between new customers and old customers. The bank would<br />
charge low charges to attract new customers and once the customers are locked,<br />
the banks would charge higher prices which may be in the form of switching<br />
costs. (ii) Switching costs served as an entry barrier because it does not allow<br />
switching to consumer to bank with cheaper and better product. If the switching<br />
costs are high it was uneconomic for new entrants in the market to induce<br />
customer to switching. (iii) The third aspect was it discourages product innovation.<br />
When a new product is introduced in the market due to innovation and the<br />
switching costs are low the customer would like to switch to the new product. But<br />
if the switching costs are high there would be no reward and no customer would<br />
like to switch. In the EFTA report it has been stated that in order to have the<br />
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benefits of the competition in the banking sector the customers should be able to<br />
choose their banks. Any obstacle that reduces consumers’ ability to switch banks<br />
would reduce the competitive pressure on the banks. If closing charges are charged<br />
by bank this would reduce the mobility of the customers. High level of switching<br />
cost in the banking industry results in increasing the bank market power and<br />
enables banks to extract extra rent form the customers. High switching costs also<br />
constitute barriers to entry as it makes harder for new entrants to attract new<br />
customers and hence it discourage new market entry. High switching costs also<br />
discourage product innovation as customers would be reluctant to switch to new<br />
products and services. The finding of the both European Commission and EFTA<br />
authority are similar.<br />
(28) A study was also carried out by Amsterdam Centre for Law and Economics.<br />
In this paper it has been mentioned that switching costs may be a reason for<br />
consumers’ immobility as they remain locked-in one supplier. Switching costs<br />
also influence on behaviour as the firms should attract new customers by charge<br />
low prices and in order to exploit captured customers. The firms cannot<br />
discriminate between old and new customers due to high switching costs they<br />
have been giving incentives to keep their prices high and exploit their old<br />
customers instead of attracting new customers through lower prices. Therefore, it<br />
has been stated in the report that switching costs played an important role in<br />
consumers’ decision. In another report, the European Commission had analysed<br />
the switching costs in the electricity market. In this report, the Commission held<br />
that in the market of retail banking a policy of the mobility of the competitors has<br />
got to be followed.<br />
(30) In banking, asset and liability management is the practice of managing risks<br />
that arise due to mismatches between the assets and liabilities (debt and assets)<br />
of the bank. A corporation that wishes to acquire an asset must decide whether to<br />
pay cash, thereby reducing an asset, or take out a loan, thereby increasing a<br />
liability. The banks contended that due to the pre-payment of the loans banks<br />
will be in a situation in which it will be difficult to manage the liabilities (saving<br />
accounts/fixed deposits/borrowing, etc.) of the banks. Further, the concern is<br />
also related with the depositors with the banks as they are being provided fixed<br />
interest rates on their deposits.<br />
(31) Although, through the pre-payment of loan, the principal money is repaid<br />
well in advance to the banks through foreclosure. Even if it has been paid through<br />
switching banks or availing loan by the other competitor banks, the bank<br />
foreclosing the loan will get their principal money returned well before the tenure<br />
and will provide opportunity to further pump in the market.<br />
(32) Concept of time value for money is well recognised in the financial market.<br />
As the money received today has better value than the same amount of money<br />
received in future. For example, Rs. 100 of today’s money invested for one year<br />
and earning 5 per cent interest will be worth Rs. 105 after one year. Therefore,<br />
Rs. 100 paid now or Rs. 105 paid exactly one year from now both have the same<br />
value to the recipient who assumes 5 per cent interest; using time value of money<br />
terminology, Rs. 100 invested for one year at 5 per cent interest has a future value<br />
of Rs. 105.<br />
Accordingly a principal received five years earlier will have more value than<br />
received 5 years later, as the money will again in the process of generating interest<br />
through advances.<br />
a<br />
b<br />
c<br />
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g<br />
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i<br />
2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0345<br />
Further, the Equated Monthly Installments (EMI) is calculated in such a way that<br />
in the initial period of the payment, the component of he principal amount is very<br />
low and the interest portion is very high.<br />
Suppose, if any customer wishes to foreclose the loan amount of 1 lac in the<br />
fifth year which has been taken for 10 years at the rate of 10 per cent per annum.<br />
The EMI of this will be Rs. 16,275/Annual, The EMI contains an interest<br />
component as well as a principal component. The interest component is always<br />
10 per cent of the balance because the interest rate is 10 per cent. The remaining<br />
amount is the principal repayment.<br />
(33) In view of the calculation of EMI and the “time value for money”, it is evident<br />
that banks are unreasonably charging foreclosure amount as the consumer is<br />
bound to pay more first in terms of interest portion in the initial months of the<br />
payments and later he is made to pay in terms of pre-payment charges, if he<br />
decides to foreclose for better options. As this practice is fleecing, the consumers<br />
and also it is not generating any economic value to the development and restricting<br />
the consumer to exercise the right of freedom to choose better financial options for<br />
the loan.<br />
(34) Moreover, the practice of pre-payment penalty on loans is not helping the<br />
banks to be more service efficient and competitive on the interest rate being charged<br />
on loans to the existing customers as banks are sure of their secured customers<br />
due to the anti-competitive agreement of pre-payment penalty.<br />
(35) It is thus clear that the main aim of the banks or housing finance companies<br />
is to find the customers and not allow them to switch to other institutions. It also<br />
allows the banks to overcharge the customers as they are giving loans to new<br />
customers at lower rate of interest. Because of these facts, competition between<br />
the banks is killed and no new products would come and no innovation would<br />
be introduced. This practice also does not allow new banks/institutions with<br />
lower rate of interest to garner new business. Therefore, by charging pre-payment<br />
penalty, the banks/institutions are following anti-competitive practices which is<br />
having an appreciable adverse effect on competition in India.<br />
(36) Another argument which has been advanced is that if the customers prepay<br />
their loans what would the banks/HFCs do with the case which would be<br />
available with them. The market of home loan in India is very large and there is a<br />
very big shortage of houses in India. Further there is a cap placed on the banks as<br />
far as housing loans are concerned. The banks/HFCs would be in a position to<br />
loan the amount received as pre-payment to new loan creditors. This in turn<br />
would lead to construction of new houses or the purchase of new flats and would<br />
help in the economic development of India.<br />
(37) The housing loan market is a very secure market as the creditors which are<br />
banks/HFCs have the securities of the houses/flats to recover their loans. To<br />
spur economic activities and decrease the shortage of houses, the banks/HFCs<br />
have to increase the portfolio of the loans for homes. In India the home loan<br />
market constitutes a minuscule of the total loan given by the banks. The banks<br />
charge lower interest on large loans given to large industrial houses but they do<br />
not do so in the home loan market. When an industrial house is in financial<br />
trouble, the banks restructure the loans by waiving interest but it is not done in<br />
the case of home loans. Home loans are given in India in two forms. There is a<br />
fixed interest home loan and there is a floating interest home loan. In the case of<br />
floating interest, home loan if the interest rate rises, the home loan interest is<br />
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raised by the banks and if the interest rate goes down, the interest on the home<br />
loan interest goes down. But in practice it is found that even when the interest has<br />
gone down, the banks have not reduced the interest. Thus, the banks/HFCs have<br />
been not very honest with their home loan customers.<br />
(40) A similar case came up before the French Competition Authority. In the year<br />
2000, Couseil de la concurrence (French Competition Commission) found that several<br />
banks and institutions had entered into anti-competitive agreement in the sector<br />
of home loans. According to this agreement, the banks/institutions had reached<br />
an “inter-bank non-aggression pact” under which each of them refrained from<br />
making offers to customers of other banks who wished to renegotiate their property<br />
loans. Besides aiming to prevent competition between banks, this agreement<br />
enabled each of them to better resist requests by their own customers to renegotiate<br />
their loans, since the customers in question were subsequently unable to turn to<br />
another bank in the event of their request being refused. The Competition<br />
Commission held that this agreement between the banks constitutes an anti<br />
competitive practice and that was viewed seriously by all the competition<br />
authorities.<br />
It also ruled that banking activities are subject to competition law and that the<br />
competitive workings of the market are based on the independence and<br />
autonomy of the players involved, The authority held that because the agreement<br />
between the banks acts as barriers the consumers were deprived of the option of<br />
significantly reducing their property cost The authority also hold that property<br />
represents the most substantial investment by households and the repayment<br />
of loans required for this investment accounts for 30 per cent of their disposable<br />
income. Thus, disposable incomes of the household were decreased. For this<br />
reason, economic development suffered and the markets were deprived of large<br />
amount of funds. The authority thereafter levied a fine of 150 million on<br />
the banks.<br />
(41) In the background of the legal position and the fact of the case, we have to<br />
examine each and every argument which has been raised by the banks and HFCs<br />
before the Director General and the Commission. The first argument is that the<br />
Commission had no jurisdiction over banks as RBI is the regulator. This argument<br />
is without any basis as the jurisdiction over the competition issues is with the<br />
Commission and the regulation of banks/HFCs on other matters is with the RBI.<br />
(42) The second argument is that pre-payment fines are more in the nature of unfair<br />
or restrictive trade practices and should be dealt with by the Consumer Courts<br />
rather than by the Commission. It was, therefore, stated that the Commission had<br />
no legal jurisdiction. No basis has been given as to how the issues under<br />
consideration are unfair and restrictive trade practices. This argument is therefore,<br />
without any basis. In fact, the issues here are ones which show that the banks/<br />
HFCs have created an adverse effect on competition.<br />
(43) The third argument taken is that the decision taken in the IBA Circular of<br />
10 th September, 2003 should have been disregarded by the DG and that the<br />
economic consequences should have been seen by the DG. It has been conceded<br />
that the Circular had the intention of disciplining the customers and to increase<br />
the income of the banks. In fact, the circular which was more in the form of<br />
recommendation was issued with the idea of retaining the captured customers<br />
by the banks and stop then from switching by levying charges at the time of<br />
foreclosure of loans.<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
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f<br />
g<br />
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i<br />
2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0347<br />
(44) The fourth argument taken was that when a borrower prepaid his loan, the<br />
bank lost future interest and also lost avenues to invest the funds received. It was<br />
stated that this created a mismatch in the asset and liability tenure. It was, therefore,<br />
argued that the banks charged penalty from the customers to compensate the<br />
losses. Though, most of the banks argued on these lines but none of them brought<br />
any data or material to establish this claim. No material has been brought on<br />
record to establish that the banks had suffered a loss which entitled them to levy<br />
penalty for the foreclosure of loans. On the contrary, as already worked out above,<br />
as the banks recover the interest first and the principal in later years, by the<br />
foreclosure of loans, applying the principles of discounting, the banks are gainers.<br />
Regarding the funds received as pre-payment, as the home loan market is very<br />
huge, the funds can be redeployed and the banks would be gainers. Therefore,<br />
this argument of the banks/HFCs are without any basis and ought to be rejected.<br />
(45) The fifth argument raised is that the DG has not gathered any evidence to<br />
establish the penalty levied is an anti-competitive practice. The DG has invoked<br />
Section 3(3)(b) of the Competition Act which is a case of rebuttal presumption. It<br />
is for the banks/HFCs to establish that the presumption is wrong by bringing<br />
material on record. This onus cast by the operation of the Act has not been<br />
discharged by the banks/HFCs.<br />
(46) The sixth argument is that PPC enhances cash flow from the borrowers and<br />
reduces the volatility of interest rates and, therefore, enhances consumer welfare.<br />
This is a fallacious agreement because the levy of penalty decreases the cash<br />
surplus of the borrowers and, therefore, is detrimental to the welfare of the<br />
consumers.<br />
(47) The seventh argument is that PPC is a tool to manage reinvestment risk. It has<br />
been argued that when pre-payment of loans is made, the banks would have<br />
surplus cash which they may not be in a position to invest. To compensate for<br />
this loss the penalty is levied. It has been discussed that the home loan market in<br />
India is very large with an insatiable demand for home loans and, therefore, the<br />
surplus can cash can be lent to some other borrower. There may be a time lag for<br />
which a small compensation from the borrower in the form of one month’s EMI<br />
may be collected.<br />
(48) The eighth argument was that the international treatment of PPC is not<br />
relevant in the Indian context. But no material was submitted to support this claim.<br />
(50) The tenth argument is that the market should be governed by a monopolist or<br />
by an oligarchy and then only it could be said to be anti-competitive. It was<br />
argued that in the absence of such a finding, Competition Act would not apply.<br />
The fact is that this argument is very simplistic. The provisions of the Competition<br />
Act would have to be examined as to whether they would be applicable in the<br />
Indian home loan market.<br />
(51) The eleventh argument is that the loans are prepaid due to cyclical factors<br />
and that PPC gives rise to demand constraints, as opined by the DG, is without<br />
any basis. The DG is to assist the commission and it is for the Commission to<br />
decide the anti-competitive behaviour of the participants in the market and not<br />
the DG.<br />
(52) The twelfth argument raised is that PPC is not usurious, otherwise it would<br />
have been declared so by the Courts. This argument is misplaced as the only<br />
issue before the Commission is whether the behaviour of the banks is<br />
anti-competitive in the home loan market.<br />
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(53) The thirteenth argument is that the DG has recorded a finding that charging<br />
of PPC by National Housing Bank and other retail lenders is justified. As already<br />
discussed in the scheme of the Competition Act, DG is only an investigative<br />
branch of the Commission. If his findings are erroneous and without any basis,<br />
the Commission is not bound to perpetuate such erroneous findings. If PPC is<br />
found to be anti-competitive, the Commission is bound to take action against<br />
National Housing Bank and the other retail lenders.<br />
(54) The fourteenth argument is that the DG has not considered the factors of<br />
Section 19 of the Competition Act. The arguments are misplaced because it is the<br />
duty of the Commission to consider the factors of Section 19 of the Competition<br />
Act and not the DG.<br />
(55) In the fifteenth argument, it has been conceded that PPC is harmful to the<br />
borrowers. But on the contrary it was stated to be beneficial to the depositors.<br />
This argument is without any basis because the gains from PPC have not been<br />
transferred to the depositors in the form of higher interest.<br />
(56). The sixteenth argument is that the Court cases relied upon by the DG are not<br />
relevant. The argument raised here are correct because the Court cases are with<br />
reference to the Consumer Act and not the Competition Act. Further, the Supreme<br />
Court has not opined on the legality of PPC and has left it open.<br />
(57) The seventeenth argument is that the home loan market has grown at a very<br />
high rate and that PPC has not deterred the entrance of new entrants to the<br />
market. This agreement is without any basis because the market in India has<br />
grown in spite of the anti-competitive behaviour of the banks. The reason for<br />
growth of the market is the pent up demand for houses, a very high GDP growth<br />
and cash surplus with the people in India.<br />
(58) The eighteenth argument is that banks apply upward interest rates to new<br />
consumers and not to existing consumers. It was therefore, argued that pre-payment<br />
penalty is welfare inducing and helps consumers. This argument is totally incorrect.<br />
The banks in order to attract new customers charge lower rate of interest and after<br />
a year or two put the customers on a floating rate of interest which is substantially<br />
higher. But the rate of interest is not reduced even when the interest rate comes<br />
down. Thus, the banks are extorting rent from their old customers.<br />
(59) The nineteenth argument was that Section 3(3) is not applicable to the banks/<br />
HFCs because there existed no agreement between the banks and that Section 3(3)<br />
would apply only in the case of agreements. A reading of Section 3(3) would<br />
show that the Section would apply when the following situations exist - (i) when<br />
there is an agreement between the parties, (ii) Practice carried out by the parties.<br />
(iii) A decision taken by the enterprises as an association including a cartel. It is<br />
also stipulated in the Section that the parties/enterprises should be in the same<br />
line of business. Section 3(3) would apply if the conditions of Clauses (a) to (d)<br />
are satisfied. The existence of an agreement is not necessary for the application of<br />
Section 3(3) of the Act. A practice carried out or a decision taken would also be hit<br />
by Section 3(3) of the Act provided the enterprises are in the same line of business.<br />
(60) It has also been argued that the levy of penalty for the foreclosure of loans<br />
creates a healthy competition in the market and the bank industry. Further with<br />
the existence of PPC, the banks are showing very high profits and, therefore, PPC<br />
did not have any adverse effect on competition. It was also argued that banning<br />
PPC would have an adverse effect on competition. It has also been argued that the<br />
levy of penalty on the borrowers by the banks is beneficial to the consumers.<br />
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i<br />
2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0349<br />
Though these arguments were advanced no material was provided in support of<br />
these arguments. It could be possible that high profits of the banks/HFCs were<br />
due to the pre-payment penalties of due to large home loan market. No bank<br />
furnished the details of their earnings through pre-payment penalties. It is not<br />
clear how PPC leads to competition and how banning PPC would be<br />
anti-competitive. Even how PPC brings benefits to the consumers is not clear.<br />
(61) It was further argued that the PPC has been levied to stop the adventurism of<br />
the consumers, to stop volatility in the markets, to discipline the consumers and<br />
to stop the consumers from migrating to other home loan suppliers. It was further<br />
argued that PPC was a safeguard against competition and unfair trade practices<br />
and that PPC was levied to compensate for the losses suffered by the banks. It was<br />
also stated that World Bank also levied PPC. From these arguments, it is clear that<br />
the main aim for the introduction of PPC was to hold on to customers and stop<br />
consumer choice. It has been conceded by some of the banks that PPC was<br />
introduced to increase profits and reduce competition in the markets. It is not<br />
material whether the World Bank charges PPC or not. What is to be examined is<br />
as to how the levy of PPC affects the competition in the home loan market.<br />
(62) But before examining competition in the home loan market it is necessary to<br />
examine the behaviour pattern of consumers, i.e. behaviour economics. Before a<br />
theory or hypothesis is formed, it is necessary to have certain axioms. In economics,<br />
the axiom is that in a perfect market, a consumer would make a rational choice<br />
which would increase his economic well being. The question is as to how this<br />
rational choice can be made. This choice depends on whether a person wants to<br />
improve his economic well being. It also depends on the information which is<br />
available to person in the market. This choice is dependent on the advertisements<br />
which flood any market, it depends on brand value, it depends on the services<br />
which are given in the market or it could depend on the perceived advantage to<br />
the consumer. The consumer can suffer from processing overload. Consumer<br />
biases can set in the processing of information. For a market to function properly<br />
a consumer should be able to assess access and process information. Because of<br />
the bulky information which the consumer has to go through before he enters in<br />
the agreement he can enter into an agreement which is anti-competitive. This can<br />
happen due to processing overload. The agreement may lead him to high switching<br />
costs. It there are high switching costs, mobility of the consumers would be affected.<br />
Thus, a new entrants would not get customers and innovation would suffer.<br />
Even the allocative efficiency of the markets would suffer. Competition Authorities<br />
such as the OFT and others thus realise that behaviour economies plays a major<br />
role in the competition in the market. It is recognised that agreements are not<br />
sacrosant as God’s Ten Commandments. Even if a consumer has signed the<br />
agreement, it could be due to misinformation fed by the sellers of the products.<br />
Further, as discussed above, switching cost are being recovered even if there was<br />
no such factor in the agreement.<br />
(63) In the background of these facts, this case has to be decided. The facts are that<br />
the Indian home loan market is very large and is expanding at a very fast pace<br />
because of the growth of G.D.P. at a rate nearly 9 per cent. There is a shortage of<br />
houses in the country and if the credit in the home loan market increases, due to<br />
high pent up demand for loan, the gross domestic product of the country would<br />
increase substantially. This in turn would give a boost to the cement and steel<br />
industry mainly because housing contributes nearly 6 per cent to 7 per cent to the<br />
G.D.P. of India.<br />
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(64) But the banking industry and the home finance companies have introduced<br />
the concept of fines on the foreclosure of loans before the loans come to an end.<br />
When HDFC entered this segment of home loans in 1978, there was no penalty on<br />
the pre-payment of loans. When competition came in the market in the form of<br />
LIC Housing Finance in 1993, HDFC introduced the concept of penalty on the<br />
foreclosure of loans. L.I.C. Housing finance introduced the system of penalty<br />
in 1995. National Housing Bank which is the regulator in the area of home finance<br />
and which lends to banks/HFCs introduced the concept of penalties in 1997.<br />
ICICI Bank which entered this field later introduced the concept of penalties on<br />
pre-payment in 2001. The PSU banks entered the field of home loan at a later date<br />
and initially they did not charge any penalty. But after the meeting of the banks in<br />
September, 2003 the P.S.U. banks started charging penalties varying from<br />
0.5 per cent to 2 per cent. Subsequently, many of the banks did not levy penalties<br />
from customers who prepaid the loans from their own funds. But if the loans<br />
were prepaid after taking loans from another bank, the banks levied penalty.<br />
Incidentally, according to a report of ICRA, HDFC and SBI have a market share of<br />
nearly 17 per cent in the home loan market. ICICI Bank has a share of 13 per cent.<br />
Even LIC Housing is a significant player in the market.<br />
(67) During the course of hearing of the banks, it was conceded by some of the<br />
banks that the concept of penalties for the foreclosure of home loans was<br />
introduced because the banks did not want to lose customers who could have<br />
migrated to banks giving loans at a lower rate. They thus wanted to reduce the<br />
mobility of consumers and reduce their choice. The banks also wanted to discipline<br />
the consumers. The banks wanted to extract rent out of the consumers by charging<br />
the penalty as they perceived losses. But what losses they had incurred to would<br />
have incurred was not worked out. The banks were also not aware of how much<br />
they had earned out of the pre-payment penalties. The data was not available<br />
because home loans constituted a very small percentage of their total loan portfolio.<br />
In fact even today S.B.I. which is the largest bank in the country, has a total home<br />
loan portfolio of 13 per cent. Most of the banks talked of asset liability mismatch<br />
when the consumers prepaid their loans. But no material to support this claim<br />
was furnished. On the contrary, as worked out above no loss is suffered by a bank<br />
if a consumer prepays his loan. In fact, the pre-payment enlarges and deepens the<br />
home loan market because there is an insatiable demand for home loans in India.<br />
I have already dealt with the arguments raised by the banks.<br />
(68) In view of the above noted factual position, the issues are to be examined<br />
with reference to the Competition Act, 2002. The question here is of switching<br />
charges which a consumer has to pay in the form of pre-payment penalties. There<br />
is no doubt that by charging pre-payment penalty the banks reduced the choice of<br />
the customers. As a consequence of the pre-payment penalty, a customer cannot<br />
shift from one bank to another. Further, when a new bank enters the market it<br />
would not be able to get customers from the other banks because the customer<br />
would not like to shift in view of the penalties which he would have to pay if he<br />
shifts to a new bank. Thus, by levying the pre-payment penalties banks are killing<br />
competition in the home loan market. This also leads to decrease in the allocative<br />
efficiency of the market and a reduction of innovation. Under the provisions of<br />
Section 3(1) of the Act, no supplier of goods and services can enter into an<br />
agreement which causes or is likely to cause an appreciable adverse effect on<br />
competition. In all the cases where the banks enter into an agreement with a<br />
consumer for home loans, the banks have envisaged penalties provided the<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
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Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0351<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
consumer pre-pays his loans. As already discussed, the levy of switching charges<br />
in the form of pre-payment penalties causes an appreciable adverse effect on<br />
competition. Therefore, under Section 3(2) of the Act of these agreements entered<br />
into by the banks are anti-competitive agreements and, therefore, void.<br />
(69) Before declaring an agreement to be void the provisions mentioned in<br />
Section 19(3) of the Act have to be looked into. An appreciable adverse effect on<br />
competition under Section 3 cannot be determined without regard to the facts<br />
enumerated in Section 19(3) of the Act which are:<br />
(i) Creation of barriers to new entrant in the market.<br />
(ii) Driving existing competitors out of the market.<br />
(iii) Foreclosure of competition by hindering entry into the market.<br />
(iv) Accrual of benefits to consumers,.<br />
(v) Improvements in production or distribution of goods or provision of<br />
services.<br />
(vi) Promotion of technical, scientific and economic development by means<br />
of production or distribution of goods or provision of service.<br />
In this particular case for the foreclosure of the loans, a barrier has been created<br />
for new entrant in the market as no consumer would shift to the new entrant as he<br />
would suffer a loss as pre-payment penalties would have to be paid. Competition<br />
has also effected as hindrance is caused to the consumers by the levy of the<br />
penalties when a person shifts to another bank. The next issue is the accrual of<br />
benefits to the customers. When pre-payment penalty is levied there is no benefit<br />
to the consumer. In fact there is a decrease of benefits to the consumer as he has to<br />
pay penalty. Further the choice of the customer decreases. Therefore, the provisions<br />
of Clauses (a), (c) and (d) are applicable to the facts of this case. Therefore, by the<br />
levy of the switching charges by the banks an appreciable adverse effect on<br />
competition within India is created. Therefore, the agreement by the banks with<br />
the consumers for the levy of penalty for the foreclosure of loans is an<br />
anti-competitive act and, therefore, void in accordance with the provisions of<br />
Section 3(1) and 3(2) of the Act.<br />
(71) The DG has carried out investigation in this case and he has found a<br />
contravention by the banks/HFCs under Section 3(3)(b) of the Act.<br />
The findings of the DG are based on following facts/evidences:<br />
(i) The Circular dated, 10 th September, 2003 issued by IBA suggests that<br />
there is a concerted action on the part of the banks.<br />
(ii) The internal circulars issued by the banks justifying their actions of<br />
charging pre-payment penalty are anti-competitive in nature.<br />
(iii) The origin and history of this practice.<br />
(iv) Regulatory position.<br />
(v) Judicial decisions, and;<br />
(vi) International practice.<br />
In order to find out whether the DG has applied the right provisions of law in the<br />
given situation, it is important to re-look into the provisions of the Act and find<br />
out whether this case fits into the entire scheme of things as provided therein.<br />
Section 3(3) of the Act deals with the following situations:<br />
(i) the agreements entered into between the entities of the class described<br />
therein, or<br />
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(ii)<br />
(iii)<br />
(iv)<br />
any practice carried on by them, or<br />
any decision taken by them and<br />
Containing the terms set out in Clauses (a) to (d) which in substance are<br />
fixing prices, limiting or controlling supply of goods or services or<br />
technical development, sharing the market, and bid-rigging or collusive<br />
bidding.<br />
If the above conditions are satisfied, it shall be presumed to have an appreciable<br />
adverse effect on competition. They are deemed to be in per se violation of Section 3<br />
and the onus is on the party to disapprove this claim.<br />
The classes of parties to an agreement dealt with by Section 3(3) are; enterprises,<br />
associations of enterprises; persons or associations of persons and they could act<br />
in any combination. It is that they are to be an association of persons or enterprises<br />
of services. Where the association of persons or enterprises is publicly identified<br />
as a group with a unity of purpose they are named as Cartel.<br />
However, before applying this Section, it is important to understand the definition<br />
of following “terms” of the provision.<br />
“Practice carried on” - “Practice” has been defined in Section 2(m) of the Act and<br />
includes any practice relating to the carrying on of any trade by a person or an<br />
enterprise.<br />
“Service” - “Service” means service of any description which is made available to<br />
potential users and includes the provision of services in connection with business<br />
of any industrial or commercial matters such as banking......financing.........and<br />
advertising.<br />
In view of the above definition, following questions need be answered in the<br />
present case:<br />
(a) Is “Retail Home Loan Financing” is a service being provided by the<br />
banks?<br />
(b) Is there any practice of pre-payment penalty being carried by the banks?<br />
(c) Is there any association of banks?<br />
(d) Is there any concerted action on the part of the banks?<br />
(e) Are they engaged in identical or similar trade?<br />
(f) Are these association of banks is in any way limiting or controlling this<br />
provision of services?<br />
If the answer is “yes” then Section 3(3)(b) is clearly attracted in this case because<br />
as per definition, the “practice carried on. ..... by any association of enterprises or<br />
association of persons........., engaged in identical or similar trade of goods or<br />
provisions of services, which - limits or controls........provision of services;” is<br />
covered under Section 3(3)(b) of the Act and once the conditions mentioned in<br />
Section 3(3) of the Act are fulfilled, it is deemed to have “appreciable adverse<br />
effect on competition”.<br />
But before reaching a conclusion that the provisions of Section 3(3) of the Act are<br />
attracted in this case the most important thing to find out is:<br />
(i) Whether there is any agreement, arrangement or understanding or action<br />
in concert in writing or informal?<br />
(ii) Does this agreement or arrangement or understanding or action in concert<br />
cause or likely to cause an appreciable adverse effect on Competition<br />
within India?<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
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Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0353<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
As per Section 2(b) of the Competition Act, 2002, “Agreement includes any<br />
arrangement or understanding or action in concert:<br />
(i) Whether or not, such arrangement, understanding or action is formal or<br />
in writing or,<br />
(ii) Whether or not, such arrangement, understanding or action is intended<br />
to be enforceable by legal proceedings.<br />
This means that in order to fall under this definition, a concerted action on the<br />
part of enterprises or persons is a pre-requisite. Even when party to such an<br />
arrangements do not intend to create any legally enforceable mutual duties and<br />
liabilities, it shall be considered as an agreement under this act.<br />
In Technip S.A. v. S.M.S Holding Private Ltd. 1 (2005) 5 SCC 465, the Court observed<br />
that the term “agreement” covers an arrangement or understanding which may<br />
be informal as well as formal. No written proofs of agreements are required, as<br />
writing has been done away with.<br />
The definition is designed in such a way as to produce a vast and sweeping<br />
coverage for joint and concerted anti-competitive actions. There is no need for an<br />
explicit agreement in cases of conspiracy where joint and collaborative action is<br />
pervasive in the initiation, execution and fulfillment of the plan-United States v.<br />
General Motors 384 US 127.<br />
It has been a contentious issue as to what constitutes an agreement to come<br />
within the ambit of competition enquiry. In CFI Judgment in Volksawagen AG v.<br />
Commission (2003), it has been held that there is no need for an explicit agreement<br />
in writing but there should be consensus between the parties concerned also<br />
referred to as meeting of minds or concurrence of wills.<br />
It has further been held in Commission v. Bayer AG (2004) 4 CMLR 13, that it is<br />
sufficient that the parties to the agreement have expressed there joint intention to<br />
conduct themselves in the market in a specific manner. As regards the form in which<br />
the common intention is expressed, it is sufficient for a stipulation to be the expression<br />
of the parties’ intention to behave on the market in accordance with its terms.<br />
However, there have been practical difficulties to establish the existence of an<br />
anti-competitive agreement between the firms. The fact is the firms engaging in<br />
anti-competitive behaviour have developed sophisticated mechanics of hiding<br />
their behaviour so that they escape the liability under the anti trust laws. Lord<br />
Denning in RRTA v. W. H. Smith & Sons Ltd. have observed “People who combine<br />
together to keep up prices do not shout it from the house tops. They keep it quite.<br />
They make their own arrangements in the cellar where no one can see. They will<br />
not put anything into writing nor even into words. A nod or wink will do.”<br />
From the above definition of “agreement”, it can be concluded that if following<br />
conditions are there, then it can be said that there is an agreement:<br />
• Any formal or informal arrangement or understanding.<br />
• No need to have an explicit agreement in cases of conspiracy where joint and<br />
collaborative action is pervasive in the initiation, execution and fulfillment of<br />
the plan.<br />
i<br />
1 Ed.: MANU/SC/0385/2005: III (2005) BC 56 (SC): [2005] 125 CompCas 545 (SC): (2005)<br />
4 CompLJ 385 (SC): 2005 (4) CTC 209: JT 2005 (5) SC 506: [2005] 60 SCL 249 (SC): [2005]<br />
Supp (2) SCR 223<br />
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• No need for an explicit agreement in writing but a consensus, between the<br />
parties concerned which referred to as meeting of minds or concurrence of<br />
wills, is sufficient.<br />
• It is sufficient that the parties to the agreement have expressed there joint<br />
intention to conduct themselves in the market in a specific manner.<br />
• As regards the form in which the common intention is expressed, it is sufficient<br />
for a stipulation to be the expression of the parties’ intention to behave on the<br />
market in accordance with its terms.<br />
• No need to have anything into writing or even into words. A nod or wink<br />
will do.<br />
However, there is a feeling of some different inference on the term “agreement”.<br />
There is a view that Section 3(3) is wider in scope than Section 3(1) as Section 3(1)<br />
deals only with any agreement whereas Section 3(3), in addition to any agreement,<br />
also covers practices carried on or decision taken by which results in AAEC. The<br />
fact that the Act uses, these three terms also indicates that “agreement”. “practices<br />
carried on” and “decision taken” are envisaged as distinct and distinguishable.<br />
A “follow the leader” syndrome may lead to anti-competitive “practices<br />
carried on” and “decision taken” without being an “agreement”. But these would<br />
still be actionable under Section 3(3) if they result in acts covered under<br />
Sub-clauses (a) to (d).<br />
The inference drawn can not be subscribed to Section 3(1) is the covering Section of<br />
the entire Chapter on “Prohibition of agreements” and it is the broader provisions<br />
which covers both Section 3(3) and Section 3(4). In fact, in Section 3(1) two<br />
situations, i.e. 3(3) and 3(4) have been envisaged. It means that any contravention<br />
of Sections 3(3) and 3(4), the contravention of Section 3(1) has to be there. Section 3(1)<br />
is inherent and implicit in Section 3(3) and 3(4). It also can not be concluded that<br />
“practices carried on” or “decision taken by” as provided in Section 3(3) can be<br />
without any “agreement”. Agreement is a necessary element in all the Sections<br />
provided under Section 3. It is the crux of the Chapter “Prohibition of agreements”.<br />
Unless there is an agreement, there cannot be prohibition of agreements. Thus, a<br />
contravention of Section 3(3) without having an agreement can not be visualised.<br />
This presumption is further strengthened by the fact that in Section 19(3) also<br />
it is clearly mentioned that while determining whether an agreement has an<br />
AAEC under Section 3, have due regard to all or any of the following factors,<br />
namely (a) to (f).<br />
There is a feeling that to establish an “agreement” between persons, there has to<br />
be conclusive evidence. This is not a correct presumption. Even under Evidence<br />
Act two types of evidence have been prescribed to establish an offence - i.e. direct<br />
and circumstantial. As has been stated above and is a settled position also that in<br />
the case of cartels or anti-competitive agreements to establish an “agreement” of<br />
being anti-competitive in nature direct evidence can not be found unless through<br />
dawn raids, so, one has to depend on circumstantial evidence or the<br />
preponderance of probabilities. In the present case there is both circumstantial<br />
evidence as well as preponderance of probabilities which establishes that there<br />
was an “agreement” among the banks to carryout the practice of charging<br />
pre-payment penalty. Further, Evidence Act is strictly not applicable to these<br />
proceedings.<br />
(72) Now, let us examine whether any or all elements of an anti-competitive<br />
agreements are present in the case under consideration. Is it not a fact that there<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
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a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0355<br />
was a meeting of IBA in September, 2003 where all members bank were present<br />
and the issue of pre-payment penalty issue was discussed? It is irrelevant whether<br />
there was an agreement, consensus or a decision to impose the PPC. Why this<br />
meeting was held in 2003? There is a background to that. When HDFC was the<br />
only player in the home loan financing market from 1978 to 1993, they never felt<br />
the need of imposing PPC nor they raised any issue such as ALM, but when LIC<br />
HFC entered into the market in 1993 then they felt threatened and started charging<br />
PPC. Again when other players entered the Home Loan Market, the LIC HFC also<br />
started charging PPC to protect its market. Then other players also started<br />
advocating the imposition of PPC in order to hold their domain. That was the<br />
reason why this IBA meeting was held in 2003. Though, no consensus was reached<br />
due to opposition from some of minor players in HLF market, all major banks<br />
started this practice after this meeting.<br />
So, what these signify?<br />
• Was not there any tacit arrangement or understanding or a joint conspiracy<br />
and collaborative action which is pervasive in the initiation, execution and<br />
fulfillment of the plan, i.e. the charging of Pre-payment penalty?<br />
• Was not there meeting of minds or concurrence of wills?<br />
• Have not they expressed there joint intention to conduct themselves in the<br />
market in a specific manner?<br />
• Was any formal, explicit or written agreement is still required in this case?<br />
• Is not there a concerted practice on the part of the banks to charge pre-payment<br />
penalty more or less at the same rate and terms & conditions?<br />
• Is not there any coordination among the banks to charge pre-payment<br />
penalty to protect their market as held by the European Court of Justice in<br />
Sugar Cartel case (1969) 3 All ER 1065 that conceptually concerted practice is a<br />
form of coordination between the parties where they have not reached the<br />
stage of actual agreement but knowingly coordinate their actions and cooperate<br />
with one another instead of competing with each other?<br />
73. Now, coming to the “Practice carried on” by these Banks” which is limiting or<br />
controlling the provision of services”, it is a fact that the banks have adopted the<br />
practice of imposing pre-payment penalty to Borrowers who wish to either repay<br />
their loan in advance or to the Borrowers who wish to migrate the said loan to<br />
another lender. The Banks are charging a rate of pre-payment penalty varying<br />
from 1 per cent to 4 per cent on the outstanding loan amount. The banks have<br />
formed an association of banks known as Indian Banks Association (IBA). Though<br />
the Circular dated, 10 th September, 2003 issued by the IBA was not binding on<br />
any banks and it was optional for any bank to impose pre-penalty charge, it can<br />
not be denied that the practice adopted by most of the banks is a concerted action<br />
on the part of the banks in view of the settled legal position discussed as above.<br />
These banks are indulged in the restrictive practice as the consumers are not<br />
allowed to switch over from one bank to another because of this pre-payment<br />
penalty Clause. Switching costs are costs that existing customers have to incur<br />
when changing suppliers. Customer mobility and choice is essential to stimulate<br />
retail-banking competition but, here, consumers are tied to their bankers due to<br />
the existence of switching costs i.e. pre-payment penalty charge.<br />
Secondly, the loans were provided to those customers by the banks on floating<br />
rate of interest were made to understand that the rates will fluctuate as per the<br />
prevailing conditions of the market, however, in practice, it is observed that interest<br />
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rates were revised upward and not downward. Whenever there was condition in<br />
the market to lower the interest rate, lower rate of interest were being offered to the<br />
new customers and the existing customers were not being benefited.<br />
Differential treatment were being given to the new loan customers by the banks<br />
by providing very lower interest rate on loan amount in comparison to the existing<br />
loan consumers. If the existing customer asked banks to lower the interest rate at<br />
par with the new customers, it was conditioned by the banks to pay pre-payment<br />
penalty/ foreclosure amount on the outstanding loan, and then to apply for<br />
fresh loan.<br />
If any customer decides to pre-pay/foreclose the loans, they had to pay a certain<br />
percentage as penalty amount, i.e. normally 2 per cent - 5 per cent on the outstanding<br />
loan amount to clear their account, is not this practice anti-competitive, and the<br />
practice is limiting the provision of services?<br />
(74) Now, what is to be seen by the Commission? Under Section 19(3) of<br />
Competition Act, 2002, the Commission, while determining whether an agreement<br />
has an appreciable effect on competition under Section 3, is required to consider<br />
the all or any of the following factors:<br />
(a) creation of barriers to new entrants in the market;<br />
(b) driving existing com[editors out of the market;<br />
(c) foreclosure of competition by hindering entry into the market;<br />
(d) accrual of benefits to consumers;<br />
(e) improvements in production or distribution of goods provision of services;<br />
(f) promotion of technical, scientific and economic development by means<br />
of production or distribution of goods or provision of services.<br />
However, it is a wrong presumption that the parameters prescribed under<br />
Section 19(3) are not required to be applied while assessing an “agreement”<br />
under Section 3(3) as it is a deeming provision. Merely because, it is a deeming<br />
provision, it does not mean that the Commission is deprived of its powers to<br />
apply these factors while determining AAEC. Section 19(3) is a mandatory<br />
provision and the Commission is bound to apply these factors for arriving at<br />
AAEC. In my opinion, the deemed provisions of Section 3(3) is for forming a<br />
prima facie opinion and not the final one. The parameters given in Section 19(3)<br />
are not the “cause” of AAEC but a result thereof. For example, if an “agreement”<br />
results into the creation of barriers or driving existing competitors or forecloses<br />
the competition and so on, there has to be AAEC.<br />
So, what Commission is to determine is that due to the practices followed by<br />
the banks are there any entry barrier is being created? Is the competition is<br />
being foreclosed by hindering entry into the market or due to such practice any<br />
benefit is being accrued to the consumers? Because, the principle objective of<br />
competition law is to maintain and encourage competition as a vehicle to<br />
promote economic efficiency and maximise consumer welfare. The focal point<br />
of competition should be the actual and/or potential business conduct of<br />
firms in a given market and not on the absolute or relative size of firms. What<br />
needs to be seen by the commission is that whether a firm can exercise “market<br />
power”, i.e. engage in business practices which substantially lessen or prevent<br />
competition. The relevant product market in this case is “retail market of home<br />
loan financing” and the relevant geographic market is whole of India.<br />
(75) The case was, therefore, examined from the point of view of Section 19(3)<br />
and it is found that:<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
128<br />
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a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0357<br />
(i) The practice of imposing pre-payment penalty to borrowers who wish to<br />
either repay their loan in advance or to borrowers who wish to migrate<br />
the said loan to another lender, is rampant in the market and there is<br />
only one exception to that. The rates of pre-payment penalty vary from<br />
1 per cent to 4 per cent on outstanding loan. The said pre-payment penalty<br />
charged from borrowers appears to be arbitrary, anti competitive and<br />
without any basis.<br />
(ii) The asset liability mismatch argument does not support a charge of<br />
1-4 per cent penalty. Moreover, at least in an increasing interest rate<br />
scenario, the lender is actually benefited by the pre-payment because<br />
it should have raised the money at cheaper rate and now it can lend it<br />
at much higher rate, so there is no reason to levy a charge on the<br />
pre-payment. Secondly, ALM is not account specific and it matches the<br />
tenors of all deposits with all loans. This aggregation effect should render<br />
the impact, if any, to an insignificant amount.<br />
(iii) Large corporate prepay hundreds of crores of loans (which should cause<br />
bigger ALM issue for banks) whenever they get cheaper funds, but it is a<br />
common knowledge that the banks do not charge any pre-payment<br />
penalty. Moreover, the same corporate are given funds below PLR rates.<br />
It goes to prove that loss due to ALM is not the reason to charge<br />
pre-payment penalty. It is mainly to restrict small borrowers from<br />
choosing a cheaper loan.<br />
(iv) The pre-payment penalty is clearly to stop a borrower from going to a<br />
competitor for a cheaper interest rate or for better service. Through the<br />
pre-payment of loan, the principal money is repaid well in advance to<br />
the banks through foreclosure. Even if it is paid through switching over<br />
from one bank to another, the banks get their principal money returned<br />
well before the tenure and this provides opportunity to the banks to<br />
further pump money in the market.<br />
(v) Pre-payment penalty is in effect an enhancement of interest rate from<br />
back door. The lenders advertise a lower interest rate but in effect it is<br />
higher due to such penal charges.<br />
(vi) At the time of sanction of loans the lenders recover processing and other<br />
charges over and above the interest charge which is sufficient to cover all<br />
their risks plus a reasonable profit. There is no reason to impose<br />
pre-payment penalty to the tune of 1-4 per cent of outstanding amount.<br />
(vii) Most borrowers fail to reckon and compare the exit loads mentioned by<br />
the lender because they are not clear when they will need to repay the<br />
loan and what will the outstanding at that time. This situation is exploited<br />
by the lender.<br />
(viii) There appears to be no financial calculation to establish that pre-payment<br />
charge of 1-4 per cent is reasonable and justified as the concept of “time<br />
value for money” is not recognised by these Banks. As the money received<br />
today has better value than the same amount of money received in future.<br />
If we calculate the EMI and the “time value for money” it will be evident<br />
that banks are unreasonably charging foreclosure amount as the consumer<br />
is bound to pay more first in terms of interest portion in the initial months<br />
of the payments and later he is made to pay in terms of pre-payment<br />
charges, if he decides to foreclose for better options. This practice is<br />
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fleecing the consumers and also it is not generating any economic value<br />
and restricting the consumer to exercise the right of freedom to choose<br />
better financial options for the loan.<br />
(ix) Moreover, the practice of pre-payment penalty on loans is not helping<br />
the banks to be more service efficient and competitive on the interest rate<br />
being charged on loans to the existing customers as banks are sure of<br />
their secured customers due to the anti competitive agreement of<br />
pre-payment penalty.<br />
(x) There has been a tacit agreement among banks to follow the practice of<br />
pre-payment penalty and foreclosure fees on loans as to hold back their<br />
customers from switching over to other banks. Since, all lenders have<br />
imposed pre-payment penalty, it indicates of a concerted action leading<br />
to suspicion of cartelisation. In fact, many lenders have already admitted<br />
that this practice is being adopted by them to stop their customers to<br />
switch over from one bank to another.<br />
(xi) Even if it has not all the elements of cartel, which is prohibited under<br />
Section 3(3) of the Competition Act, 2002, customers were prevented from<br />
significantly reducing their property debts as it represented the most<br />
substantial household and repayment accounted for 50 per cent of their<br />
disposable income. This restricts competition, as it restricts a consumer<br />
to avail banking services of another bank which is ready to offer the loan<br />
at lower interest rates.<br />
(77) In another case, the French Competition Authority known as Conseil de la<br />
Concurrence, has dealt with the identical issue of giving property loans to<br />
individuals by different banks and charging pre-payment penalty. The gist of the<br />
decision is given below:<br />
Facts - In this decision, the Conseil de la Concurrence had, for the first time, to<br />
deal with anticompetitive practices in the banking sector. In 1993, the Conseil<br />
decided on its own initiative to investigate the property loans to individuals<br />
offered by the main French high-street and saving banks representing up to<br />
two-thirds of the relevant market.<br />
The investigated period took place while the long-term property loans were<br />
fluctuating, peaking at 20 per cent in the early 1980s then falling gradually from<br />
12 per cent in 1992 to less than 8.5 per cent in 1994. In such circumstances, any<br />
individual whose loan’s maturity exceeded five–seven years, could have benefited<br />
from the fall. Loans holders were then interested in either renegotiating with their<br />
bank, or benefiting from the competitive situation by paying off their loan earlier<br />
and subscribing to a new one in a rival bank.<br />
However, such a possibility allowing individuals to take full benefit of the market<br />
evolutions had been jeopardized by an “inter-bank non-aggression pact” which<br />
led to two main competition restrictions. First, the banks who signed the said<br />
agreement refrained from making offers to rival banks’ customers who wanted to<br />
subscribe to a new loan. Secondly, the agreement enabled each of the banks to<br />
better resist requests by their own customers to renegotiate their loans, since<br />
these customers could not ask another bank in case their request was rejected.<br />
The Conseil noted that, even if a cartel agreement between banks was not applied<br />
in a uniform manner, borrowers were prevented from significantly reducing their<br />
property debts, even though property represented the most substantial investment<br />
by households, and the repayment of loans required for this investment accounted<br />
a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
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a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
2011]<br />
Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd.<br />
(R. Prasad, (Member)—Dissenting Order)<br />
0359<br />
for 30 per cent of their disposable income.<br />
According to the banking establishments, the outstanding amounts likely to be<br />
affected by the renegotiation of property loans during the period in question<br />
amounted approximately to EUR 90 billion. However, households were only<br />
able to renegotiate around EUR 5.5 billion which represented for them an overall<br />
reduction in interest charges of about EUR 450 million over 10 years.<br />
Given the seriousness of the practice and the national scope of the agreement<br />
implemented by the main property loans operators, the Conseil imposed fines to<br />
nine banks totaling more than EUR 150 million. This is one of the highest fines<br />
ever imposed by the Conseil de la Concurrence.<br />
Comment - The Conseil de la Concurrence stated that, although banking activities<br />
are governed by specific regulations, they are still subject to competition law.<br />
The Conseil also indicated that any competitive market is based on the<br />
independence and autonomy of the players involved. It stated that when concerted<br />
practices lead to the removal of any uncertainty, they effectively distort<br />
competition; since each single actor is assured that the other banking networks<br />
will apply the same commercial policy.<br />
(78) In view of the facts and circumstances stated above there is no doubt that<br />
there is a contravention of Section 3(3)(b) of the Competition Act, 2002 as these<br />
Banks have adopted a practice of imposing pre-payment penalty by way of a<br />
concerted action which in effect limits or controls provision of services which<br />
resulted into foreclosing of customers mobility and by hindering entry into the<br />
market and thereby, no benefit is being accrued to the consumers.<br />
(79) In the consequences by having a system of pre-payment penalties for the<br />
foreclosure of the loans, the banks and the home loan companies have contravened<br />
the provisions of Section 3(1), 3(2), 3(3) and 3(4) of the Competition Act.<br />
23. Considering the facts of the case there is a contravention of Sections 3(1), 3(3)(b),<br />
3(4) and 4(1) of the Competition Act, 2002 by India Bulls Financial Services Ltd.<br />
24. India Bulls Financial Services Ltd. is, therefore, directed under Section 27 of the<br />
Competition Act to stop the practice of levying pre-payment penalty on the foreclosure<br />
of loans against purchase of properties.<br />
g<br />
h<br />
i<br />
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a<br />
b<br />
c<br />
d<br />
e<br />
f<br />
g<br />
h<br />
i<br />
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B-209<br />
Section B<br />
Articles<br />
The Tripod of Independence, Expertise and<br />
Accountability of a Regulator – An Analysis of the<br />
Indian Competition Law<br />
Dr. S Chakravarthy*<br />
This is the second part of the three part Article on Independence, Expertise and<br />
Accountability of Regulators. The first part appeared in the May-June issue.<br />
The third and final part will appear in the next issue, September-October 2011.<br />
References will appear in September-October 2011 issue.<br />
In this part, the author says that in order to effectively and efficiently discharge its<br />
duties, a regulator, perforce, needs some degree of freedom to be provided by the<br />
statute creating it. This degree of freedom or independence should not be absolute<br />
but should be circumscribed by the laws of the land and the policy of the Government.<br />
Institutional independence is imperative for the regulator to perform the<br />
challenging task of maintaining a judicious balance amongst conflicting interest<br />
and maintaining an arm’s length relationship from interest groups. The statutes<br />
creating the institutional regulators may or may not explicitly mandate<br />
independence for them. In reality and practice, many regulators lack the requisite<br />
functional and organisational autonomy to be genuinely independent.<br />
* Dr. S. Chakravarthy is a civil servant by profession in India. He was Member, Monopolies and<br />
Restrictive Trade Practices Commission and also Member, High Level Committee on<br />
Competition Policy and Law appointed by Government of India. He was also Member of the<br />
Competition Law Drafting Committee and Advisor to Government on Competition Policy<br />
and Law. Presently, he is Advisor/Consultant on Competition. He is a consultant to World<br />
Bank, ADB etc. E-mail: chakravarthy38@hotmail.com and chakravarthy38@gmail.com.<br />
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The author discusses as to how<br />
independence could be undermined on<br />
the touchstone of budgetary allocation,<br />
automatic funding, fixed tenure of the<br />
members of the regulator, their removal<br />
provisions and the bar on them for<br />
employment when they demit office.<br />
It was posited in the first part of this<br />
Article (see CLR issue May – June 2011)<br />
that the three pillars, namely,<br />
Independence (Autonomy), Expertise<br />
and Accountability, would constitute the<br />
tripod for a regulator, if that body has to<br />
be not only efficient but also effective. In<br />
this second part, the first pillar of the<br />
tripod is addressed.<br />
Independence/Autonomy<br />
In order to effectively and efficiently<br />
discharge its duties, a regulator, perforce,<br />
needs some degree of freedom to be<br />
provided by the statute creating it. This<br />
degree of freedom or independence<br />
should not be absolute but should be<br />
circumscribed by the laws of the land and<br />
the policy of the Government. Having<br />
said this, the regulator should not be<br />
dependent on the executive for survival.<br />
Its survival needs to be guaranteed by<br />
law.<br />
As noted earlier in the first part,<br />
institutional independence has become<br />
imperative for the regulator to perform<br />
the challenging task of maintaining a<br />
judicious balance amongst conflicting<br />
interest and maintaining an arm’s length<br />
relationship from interest groups. The<br />
statutes creating the institutional<br />
regulators may or may not explicitly<br />
mandate independence for them. In<br />
reality and practice, many regulators lack<br />
the requisite functional and<br />
organisational autonomy to be<br />
genuinely independent.<br />
Independence may be viewed in terms of<br />
“negative freedom” and “positive<br />
freedom”. The former is freedom from<br />
external coercion and the latter is freedom<br />
to do what one (the regulator) wants.<br />
External coercion arises mainly from the<br />
discretion that the Government has in<br />
making available to the regulator funds<br />
for its expenses. For instance, the new<br />
Indian Competition Law, Competition<br />
Act, 2002 states in Section 50 thereof, that<br />
the Central Government may “make to<br />
the Commission grants of such sums of<br />
money as the Government may think fit<br />
for being utilised for the purposes of this<br />
Act” (Emphasis supplied). This<br />
discretion takes the form of external<br />
coercion and prejudice the negative<br />
freedom referred to above. In particular,<br />
Government could utilise this weapon<br />
of discretion to pressurise the regulator<br />
to decide a particular case, issue or<br />
dispute in a desired manner. For obvious<br />
reasons, Government may not document<br />
its pressure but in subtle ways twist the<br />
arms of the regulator to decide a matter<br />
in a particular manner. Besides the said<br />
pressure, there could be other kinds of<br />
pressure constituting external coercion.<br />
Political pressure, “old boys’ network”<br />
pressure and the like are examples of<br />
external coercion, administered on the<br />
regulator subtly undermining negative<br />
freedom.<br />
Positive freedom is not an unbridled<br />
freedom but is tethered to the confines of<br />
the statute creating the regulator. Within<br />
the contours of the statute, the regulator<br />
must have the freedom to adjudicate and<br />
pass orders on disputes or decide matters<br />
like tariff fixing etc. This positive freedom<br />
is imperative to the regulator, if it has to<br />
perform its assigned functions and be<br />
effective in the market. The different<br />
market players must have confidence and<br />
faith in the regulator holding the balance<br />
even and in ensuring a level playing field<br />
for them.<br />
Governments, despite creating<br />
institutions as regulators and despite<br />
proclaiming their intention to accord<br />
them functional independence, in<br />
practice, are generally found to loathe<br />
loosening direct control over them. The<br />
Executive would like to keep the<br />
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regulators in some kind of a check, be it<br />
through funding mechanisms or through<br />
arm twisting tactics of different kinds.<br />
Yet, it cannot be gainsaid that<br />
independence of regulators is the<br />
touchstone of their effectiveness,<br />
efficiency, transparency and<br />
accountability in the system. The<br />
discussion paper (CUTS, 2006a) very<br />
succinctly observes:<br />
Institutional independence has an<br />
inverse relationship with external<br />
influences over the authorities. The<br />
lesser the influence, the greater will<br />
be the scope for functional autonomy.<br />
There could be a host of possible<br />
external influences, including those<br />
wielded by interest groups. However,<br />
the relationships these bodies<br />
maintain with the Government have<br />
always been at the centre stage of the<br />
debate. The Government can always<br />
discover ways and means to<br />
conveniently distort the nature and<br />
extent of functional autonomy of such<br />
institutions. Therefore, in practice, the<br />
extent of the vulnerability to<br />
Government influence actually<br />
determines the degree of independence<br />
for these institutions.....<br />
B-211<br />
Thus, independence viewed in terms of<br />
negative and positive freedoms<br />
constitutes an important pillar for the<br />
regulator, both sectoral and competition.<br />
Multiple Objectives—Social and<br />
Political<br />
Taking the area of competition as an<br />
example, governments generally have<br />
multiple objectives. As a consequence of<br />
multiple objectives, public interest<br />
policies and intrinsic pure competition<br />
principles often are seen to be in conflict<br />
with each other. Because of this,<br />
competition law gets diluted and also<br />
suffers inconsistent application. The<br />
myriad conflicting objectives are<br />
pursued by the stakeholders concerned<br />
through political contacts and pressure<br />
groups. Unless such pressures are reined<br />
in, the independence of competition<br />
policy authorities and competition law<br />
implementing agencies get severely<br />
undermined. Compromises and political<br />
interventions prejudice the benefits of<br />
competitive process, namely, economic<br />
efficiency.<br />
An example of this is in Box 1, a Pakistan<br />
experience.<br />
COMPROMISE INIMICAL TO COMPETITION<br />
Box 1<br />
The Monopoly Control Authority (MCA) in Pakistan has the<br />
responsibility, inter alia, to conduct enquiries into restrictive agreements<br />
and trade practices. When the cement manufacturers in Pakistan<br />
increased the sale price of a bag (50 kgs) of cement from Rs. 135 to Rs. 235<br />
in October 1998, the MCA initiated an enquiry into the causes of the price<br />
increase after noting that the cement manufacturers were indulging in<br />
price cartelisation. The All Pakistan Cement Manufacturers Association<br />
(APCMA) informed the MCA that the reasons for the increase were<br />
increase in the cost of inputs and higher taxes. After collecting data,<br />
MCA found that the costs of inputs had not gone up except power tariff<br />
and that too only marginally. The taxation levels had actually been<br />
reduced. Cartelisation was manifest among the members of the APCMA<br />
and was against public interest, according to the MCA. MCA directed<br />
the cement manufacturers to cease cartelisation and revert to the<br />
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pre-October 1998 price level. Furthermore, it imposed a fine on each<br />
manufacturer and ordered that the consumers be compensated against<br />
verifiable claims. However, the cement manufacturers refused to comply<br />
with the order of the MCA and challenged the same in the High Court<br />
and obtained stay orders. Thereafter, the Ministry of Commerce,<br />
disregarding the supposed independence of MCA, persuaded the latter<br />
to close the case. It held negotiations with APCMA, lowered excise duty<br />
on cement and fixed the price of a bag of cement at Rs. 200. In doing so,<br />
the Ministry of Commerce had given in to the pressure of the cement<br />
manufacturers’ lobby (CUTS, 2006). This compromise was clearly inimical<br />
to the independence of the competition authority and to consumer interest.<br />
In developing countries, lack of political<br />
will has been recognised as one of the<br />
bottlenecks in adoption and effective<br />
implementation of competition and<br />
regulatory regimes. One needs to<br />
acknowledge and appreciate the fact that<br />
a democratic set up requires politicians<br />
and their parties to win elections to reach<br />
to policy-making positions. Therefore,<br />
they must satisfy aspirations of their<br />
electorates to whom they have to go back,<br />
at intervals, to seek a fresh mandate. In<br />
given contexts, one can easily<br />
comprehend, if not agree with, the<br />
reasons for politicians not allowing<br />
implementation of competition policy<br />
principles. By parting with certain<br />
hitherto enjoyed powers to the regulator,<br />
Government loses the leverage it has, in<br />
satisfying sections of electorates and<br />
vested interests (vested interests are also<br />
often seen to fund the parties during<br />
elections). However, efforts are short in<br />
identifying potential gains for politicians<br />
out of promoting and implementing<br />
competition policy measures and in<br />
understanding as to how competition<br />
policy outcomes could help them retain/<br />
enhance their public image/supportbase.<br />
What is required is an alignment<br />
between the “competition policy<br />
outcomes” and the “incentives for<br />
politicians”. Accomplishment of this<br />
would go a long way in developing<br />
countries adopting and implementing<br />
competition policy principles on a fast<br />
track. For instance, where cartelisation<br />
has taken place and members of the cartel<br />
(generally with financial muscle and big<br />
pockets) fund the politicians in power,<br />
those in political power should be able<br />
to comprehend that cartels could<br />
devastate consumers, who really<br />
constitute the vote bank and that by<br />
proceeding against the cartel, a large<br />
number of consumers would benefit and<br />
consequently, may patronise them in the<br />
long run. It is difficult to posit a strategy<br />
for this except to emphasise that by<br />
following an appropriate competition<br />
policy, the long term interests of<br />
consumers will be served and so too the<br />
interests of those in power.<br />
In the Pakistan case, Government itself<br />
had intervened much to the discomfiture<br />
of the regulator. While Government<br />
should have the prerogative of making<br />
policy decisions, the field should be left<br />
free for the regulator to oversee if, within<br />
the policy framework, all players have a<br />
level playing field. But this does not<br />
happen in real life, because the dividing<br />
line between policy and regulation is,<br />
more often than not, thin.<br />
This is so, in particular, in the area of<br />
utility pricing. Utility pricing is a<br />
politically sensitive issue and<br />
Government is used to taking decisions<br />
thereon guided by political exigencies.<br />
After the creation of regulators, utility<br />
pricing should be legitimately left to the<br />
regulator, who is enjoined to maintain a<br />
balance between the interests of the<br />
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utilities, consumers, stakeholders and of<br />
course, the Government. Unfortunately,<br />
that has not been the case in many areas<br />
and jurisdictions, as was evidenced in<br />
the Pakistan case.<br />
This suggestion of leaving the area of<br />
pricing to the regulator brims with<br />
practical difficulties. Its feasibility could<br />
be in doubt in the milieu of politicoeconomic<br />
constraints. Again, the<br />
argument of short term political gains<br />
against long term economic gains<br />
surfaces. In utility pricing, the party in<br />
power may like to subsidise certain<br />
sections of society (like the farmers) in<br />
supplying power. The cost of subsidy<br />
obviously has to be borne by some other<br />
consuming sector, like the<br />
manufacturing. If so, the economy will<br />
be required to bear the cross of extra cost<br />
(arising out of subsidising the agriculture<br />
sector) suffered by the manufacturing<br />
sector. This can manifest in two ways.<br />
One, by way of enhanced price for the<br />
consumers and the other, by way of the<br />
manufactured goods getting<br />
outcompeted by goods in import. But<br />
then one has to countenance the fact that<br />
certain sections of society do require to<br />
be given certain subsidies. In that case, it<br />
will be unfair to place the burden on some<br />
other sector. A way to redress the<br />
situation is for the Government to<br />
reimburse the utility to the extent it had<br />
been advised to provide subsidy to a<br />
sector so that the burden is not<br />
unreasonably placed on someone else.<br />
This raises the larger issue of<br />
governmental policies constituting a<br />
boundary for the regulator. By and large,<br />
it is axiomatic that Government has the<br />
prerogative to lay down policies and<br />
policy framework. Particularly in<br />
democratic polities, people’s will usually<br />
stand reflected in governmental policies.<br />
For instance, in the State of Andhra<br />
Pradesh, the Congress party promised<br />
before the elections in 2004 that free<br />
power would be made available for<br />
farmers. Notwithstanding the cost to the<br />
B-213<br />
exchequer, Government after coming to<br />
power had to provide free power and it<br />
is continuing to do so even today.<br />
People’s will cannot be easily brushed<br />
aside. Regulators are bound by policies<br />
laid down by the Government. Given the<br />
sovereign authority for the Government<br />
to lay down policies and express them, it<br />
is imperative that they are conveyed to<br />
the regulators in a transparent manner.<br />
The statutes creating the regulators need<br />
to specify the power of the Government<br />
to lay down policies and specify the<br />
obligation of the regulators to be bound<br />
by them. Oftentimes, there is seen the<br />
ambiguity relating to the role and<br />
responsibilities of a regulator.<br />
Consequently, it would be eminently<br />
desirable to specify the regulator’s<br />
mandate in the statute itself. When as<br />
suggested above, the role and<br />
responsibilities of the Government are<br />
specified in the statute, the distinct turfs<br />
for the Government and the regulator<br />
will be clearly understood by both. In the<br />
event there is any confusion between<br />
policy making and regulatory role, it<br />
should be resolved by the Government<br />
issuing specific clarifications to avoid<br />
conflict-raising overlaps.<br />
In this context, a question is likely to arise<br />
as to what constitutes “policy”. Most, if<br />
not all statutes creating regulators in<br />
India, omit to define “policy”. It becomes<br />
subject to interpretation with the<br />
attendant arbitrariness in so doing, be it<br />
the Government itself, the regulator or<br />
the courts assuming the task of<br />
interpretation. The lack of clarity in this<br />
regard could undermine the<br />
independence of the regulator. The<br />
Chairperson of a regulator, if weak or if<br />
appointed on patronage by the<br />
Government would, likely seek the<br />
interpretation of the Government rather<br />
than attempt to interpret. Likewise, if he<br />
is a strong personality, he might tilt the<br />
balance in his favour, namely, that of the<br />
regulator. The Discussion Paper (CUTS,<br />
2006a) suggests a solution, as follows,<br />
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though Government may loathe<br />
accepting it, as it would like to hold the<br />
strings vis-à-vis the regulator:<br />
An independent authority law should<br />
clearly demarcate the respective<br />
domains of their functional<br />
responsibilities with the State policy.<br />
The possibility of Government<br />
interference in the functional domain<br />
of the authority, in the name of policy<br />
directives, needs to be eliminated.<br />
Even when issuing so-called “policy<br />
directives”, the law should make it<br />
mandatory for the Government to<br />
consult the authority concerned and<br />
it be given an opportunity to express<br />
views, prior to issuing such directives.<br />
Automatic Funding<br />
Independence, as noted earlier in this<br />
Article, requires in the first place,<br />
automatic funding. Government<br />
functions through Ministries and<br />
Departments, who prepare their annual<br />
budgets not only for themselves but also<br />
for the institutions within their ambit. It<br />
is customary for the Ministries to consult<br />
with the institutions within their<br />
purview in preparing and providing for<br />
a budget for them. But there are variations<br />
in this regard in the statutes creating<br />
regulators.<br />
For instance, the sectoral regulator for<br />
electricity, the Central Electricity<br />
Regulatory Commission in India is<br />
enjoined by the Electricity Regulatory<br />
Commissions Act, 1998 to prepare its<br />
budget for each financial year showing<br />
its estimated receipts and expenditure<br />
and forward the same to the Central<br />
Government (Section 31). It is the Central<br />
Government that approves the budget.<br />
Furthermore, the expenses of the Central<br />
Commission including all salaries and<br />
allowances payable to, or in respect of,<br />
the Chairperson and the Members<br />
thereof are mandated to be charged to<br />
the Consolidated Fund of India<br />
(Section 11). Likewise, the State<br />
Electricity Regulatory Commission<br />
established under the same statute is<br />
enjoined to prepare for each financial<br />
year its budget, showing its estimated<br />
receipts and expenditure and forward<br />
the same to the State Government<br />
(Section 33).<br />
The illustrations above have been<br />
provided to stress the argument that most<br />
regulators are dependent on Government<br />
making available funds for their<br />
functioning and for carrying out their<br />
responsibilities. It therefore cannot be<br />
gainsaid that there is the potential for<br />
abuse of the discretion in the hands of<br />
the Government in funding the<br />
regulator’s expenses and also that there<br />
is the possibility of prejudice to its<br />
independence. On CCI and the Act, a<br />
discussion may be seen later in the<br />
Article.<br />
Oftentimes, what is provided in the<br />
budget falls considerably short of the<br />
needs of the institutions, in terms of the<br />
objectives set for them. Short-funding of<br />
the budgetary needs of the regulatory<br />
institutions besides limiting the activities<br />
of the regulators render them to beseech<br />
the Ministries for additional allocations.<br />
This gets manifested in terms of the<br />
functionaries of the regulators<br />
frequenting the corridors of the<br />
Ministerial secretariat. Naturally, the<br />
fall-out is the undermining of their<br />
independence. Atleast, the potential for<br />
such undermining surfaces.<br />
Most, if not all, regulators do not get the<br />
funds they need or the funds they seek<br />
in their proposals forwarded to the<br />
Government. Categorical evidence is not<br />
forthcoming but this is what the author<br />
was given to understand when he spoke<br />
to some regulators. 1 Tellingly, a report<br />
1 The author spoke to the Chairpersons of TRAI, CCI and SERC (Andhra Pradesh).<br />
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of CUTS (2002) observes that the budget<br />
of the MRTP Commission “is a<br />
negligible percentage of the Union<br />
B-215<br />
Budget and the GDP”. The report has<br />
provided a Table in support, which is<br />
self-explanatory.<br />
ANNUAL BUDGET OF THE MRTP COMMISSION<br />
TABLE<br />
Year Actual Budget Budget of (3) as GDP (3) as<br />
Expenditure (Rs. in Central per cent (Rs. in of (6)<br />
billions) Govt. of (4) billions<br />
(1) (2) (3) (4) (5) (6) (7)<br />
1996 10.48 11.08 2010.07 0.0005 13682.08 0.00008<br />
1997 14.363 14.399 2320.68 0.0006 15224.41 0.00009<br />
1998 16.724 17.728 2793.60 0.0006 17582.76 0.00010<br />
1999 — 17.605 2980.84 0.00059 19569.97 0.00009<br />
Reference: CUTS (2002)<br />
An interesting aspect thrown up by the<br />
Table is that notwithstanding the order<br />
of resources made available to the<br />
Commission by the Government, the<br />
Commission itself did not expend the<br />
same fully. This is because the<br />
Government did not sanction certain<br />
expenditures in time before the year was<br />
out with the result the Commission could<br />
not spend the monies allotted relating to<br />
the sanction. 2 As CUTS (2002) has<br />
pointed out, “The Commission manages<br />
the budget but has to seek permission<br />
from the Ministry to incur expenditure<br />
beyond a certain limit”. This is what<br />
constitutes lack of functional autonomy.<br />
It impacts the independence of the<br />
regulator. This is dealt with a little later<br />
in this Article.<br />
Funding mechanism of a regulator could<br />
be in terms of two distinct methods. The<br />
first is earmarked funding. The other is<br />
empowering the regulated utilities to levy<br />
fees from the consumers. The first method<br />
guarantees a stable funding source for<br />
the regulator. In the second method,<br />
Government sometimes sets a cap on the<br />
levy of fees. In Argentina, the cap on the<br />
levy of fees is 0.5 per cent on sales tax on<br />
the telecommunication segment and 2.67<br />
per cent of the consumer bill in the case<br />
of the water regulator (Sundar and<br />
Sarkar, 2000).<br />
While budgetary constraints and<br />
financial crunch are often contributory<br />
factors for under-allocations in the<br />
budget for the institutional regulator, the<br />
problem could be resolved, if the<br />
expenses of the regulators, for instance<br />
in India, are approved by the Parliament<br />
and charged to the Consolidated Fund.<br />
In India, the Consolidated Fund is voted<br />
by the Parliament after a discussion of<br />
the draft budget. In other words,<br />
independence of the institutional<br />
regulator could be protected and<br />
subserved by the Parliament voting its<br />
requirements and directly charging the<br />
same to the Consolidated Fund.<br />
The line Ministry’s role would be<br />
confined to making an exercise on the<br />
required budgetary allocation in<br />
consultation with the institutional<br />
regulator and placing the matter before<br />
2 The author was Member, MRTP Commission and had personal knowledge of monies being<br />
unused for want of sanction of expenditure by the government.<br />
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the Parliament to vote. The exercise to be<br />
done by the Ministry needs to be linked<br />
to the objectives and activities set for the<br />
regulator on a realistic basis and<br />
whatever is decided after the exercise in<br />
consultation with the regulator must be<br />
placed before the Parliament for approval<br />
without any reduction or unilateral<br />
chopping. In a democratic polity,<br />
automatic funding needs to be<br />
understood as approval by the elected<br />
representatives of the people, namely, the<br />
Parliament with the Government’s role<br />
in carrying out the budgetary exercise<br />
being somewhat limited in the interests<br />
of the independence of the institutional<br />
regulator. Put in another way,<br />
Government will not be allowed to veto<br />
the regulator’s demand for budgetary<br />
allocation arbitrarily, for which purpose,<br />
the mechanism of effective consultation<br />
between the Ministry and the regulator<br />
should be in place.<br />
The line Ministry or Department of the<br />
Government controls the budget and<br />
other financial sanctions of the regulator<br />
in most countries. Regulator’s<br />
dependence on the line Ministry to get<br />
its budget approved is likely to limit its<br />
independence indirectly. In this context,<br />
it is desirable that the regulator is allowed<br />
to generate resources on its own through<br />
a fee, cess etc. wherever possible and is<br />
also allowed to spend it. For instance, in<br />
India, the Insurance Regulatory and<br />
Development Authority (IRDA) and<br />
Securities and Exchange Board of India<br />
(SEBI) have been allowed to raise<br />
resources on their own. TRAI and CCI<br />
have been allowed to levy fees and<br />
charges and to set up their own fund. On<br />
the other hand, TAMP and CERC are<br />
wholly dependent upon the Government<br />
for funding (CERC funds are charged to<br />
the Consolidated Fund of India). Even<br />
where a regulator is allowed to raise<br />
resources on its own, Government may<br />
not permit it the freedom to spend the<br />
amount it raises.<br />
Staying with the issue of setting up of a<br />
fund for a regulator, some of the Members<br />
of Parliament, during the discussions 3<br />
on the Electricity Bill, 2001 observed that<br />
a separate fund may result in lack of<br />
transparency and create doubts of<br />
financial probity or conduct of the<br />
regulator “leading to lack of confidence<br />
and inviting public criticism”. They<br />
queried as to what was special about the<br />
electricity regulator that a separate fund<br />
should be created, when the Supreme<br />
Court and High Courts were functioning<br />
with their expenses being met out of the<br />
Consolidated Fund of India.<br />
The TRAI Act, 2000 provides for<br />
crediting all the receipts, fees, interest<br />
and Government grants to the “TRAI<br />
General Fund”. In practice, however, the<br />
amounts are deposited in the<br />
Consolidated Fund of India, as<br />
Government revenue. TRAI gets<br />
allocations of monies as Government<br />
deems fit from time-to-time. This detracts<br />
from the independence of TRAI. The<br />
Competition Act, 2002 provides for the<br />
setting up of the Competition Fund into<br />
which will be credited Government<br />
grants, fees levied by the CCI, etc. There<br />
is no uniformity in India regarding<br />
setting up of funds for regulators but<br />
there appears no harm to set up such<br />
funds in the interests of financial stability<br />
for the regulators, subject to taking care<br />
of the concern expressed in the ensuing<br />
paragraph.<br />
One should be mindful of the possibility<br />
of a risk with the regulator using the said<br />
tool of raising resources and maximising<br />
the fees/cess as a part of fund-raising.<br />
A further risk lies in the regulator passing<br />
on the costs to the consumers, if it is<br />
allowed to charge fees for self-financing.<br />
One way out of this concern is for the<br />
3 Please see http://164.100.24.208/debate/debtext.asp?slno=3221; http://164.100.24.208/<br />
debate/debtext.asp?slno=5604; http://164.100.24.208/debate/debtext.asp?slno=5625<br />
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Government to set caps, as in Argentina,<br />
in the statute itself so that the regulator is<br />
under some check in raising resources to<br />
the detriment of the consumer. Subject to<br />
the cap, creation of separate funds for<br />
regulators is advisable.<br />
In this Article, emphasis has already been<br />
laid on the need for “automatic funding”<br />
in the interests of the independence of the<br />
regulator. The essence of “automatic<br />
funding” is the absence of dependence of<br />
the regulator on the Ministry and<br />
Department of the Government for<br />
securing its budget and subvention of<br />
funds to it. Besides “automatic funding”,<br />
the more crucial requirement for the<br />
regulator is the financial autonomy to<br />
meet its expenditure. While funding needs<br />
to be insulated from Government<br />
interference through the route of<br />
“automatic funding”, the regulator should<br />
B-217<br />
have the power to apply the funds, as it<br />
deems fit in the discharge of its duties and<br />
responsibilities. Governments, true to their<br />
general predilections for control and<br />
oversight of the functioning of the<br />
regulators, retain the power to sanction<br />
expenditures for the latter. Sometimes<br />
such powers of sanction are for<br />
expenditures beyond a threshold limit or<br />
for capital expenditure. The illustration<br />
of the MRTP Commission in India not<br />
being able to spend even the monies<br />
allotted to it for want of sanction from the<br />
Ministry of certain expenditures bears<br />
testimony to the lack of functional<br />
autonomy of the competition regulator.<br />
Even in simple matters like participation<br />
in conferences, lack of functional<br />
autonomy reared its head for the MRTP<br />
Commission.<br />
Box 2 elaborates this.<br />
PROCEDURE NOT SUBSTANCE<br />
Box 2<br />
MRTP Commission, the competition regulator under the MRTP Act, 1969<br />
may like to participate in conferences within the country and abroad in<br />
order to update knowledge and skills for its Chairman and Members in<br />
the relevant technical area and also in regulation For this purpose, the<br />
regulator has to seek Government approval prior to its participation in<br />
the conferences. In many instances in the past, delays in according<br />
approval and last minute clearances had occurred 4 with the result that<br />
the regulator found it difficult to meaningfully participate in the<br />
conferences. It is the regulator, who can analytically assess the scope,<br />
importance and usefulness of conferences for participation but, the<br />
Government is likely to view participation in the conferences on the<br />
limited perspective of expenditure involved, the number of times the<br />
regulator has participated in the past, etc. Though such considerations<br />
do have force, it should be left to the regulator to arrive at decisions to<br />
participate in conferences having regard to its professional requirements<br />
and to its needs for interaction with sister regulators of other countries.<br />
While procedure and its cousin control are important, they cannot be at<br />
the cost of substance and objectives in participation at conferences.<br />
4 The author was Member, MRTP Commission and had personal knowledge of such<br />
happenings.<br />
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B-218 Competition Law Reports<br />
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Independence is often regarded as<br />
freedom from any supervision or control<br />
by any authority. In many countries,<br />
particularly the developing ones,<br />
democracy may not be fully mature nor<br />
do their economies have the ability to<br />
adjust to the pulls and pressures of<br />
market economics. The regulatory<br />
authorities are independent only in name<br />
and to a limited extent, as their ability to<br />
balance the conflicting interests of the<br />
players in the market, the consumers and<br />
Government gets circumscribed, if their<br />
directions or adjudicatory decisions have<br />
an adverse impact on the electoral<br />
fortunes of incumbent governments.<br />
Independence and autonomy constitute<br />
the cornerstone of an effective and<br />
efficient regulator. At the same time, one<br />
should not obfuscate the possibility of the<br />
regulator having unbridled power to<br />
question and annul Government policies<br />
and objectives thus diluting the<br />
sovereignty of the Executive. There should<br />
be a balance. Care should therefore be<br />
taken to ensure that the regulator while<br />
being invested with adequate<br />
independence is not invested with<br />
excessive independence. There is the<br />
need for a balance between independence<br />
and larger public interest dimensions.<br />
Unbridled independence for the regulator<br />
is as undesirable as lack of independence.<br />
To sum up, independent regulation implies<br />
that the regulator should be independent<br />
of the stakeholders and enjoined to<br />
discharge its responsibilities in the best<br />
interests of all, without any prejudice or<br />
leaning towards any particular<br />
stakeholder. In other words, the regulator<br />
is required to ensure a level playing field<br />
for different operators in the market and<br />
also a fair deal to both the consumers and<br />
the service providers including the<br />
Government. Statutorily, the independence<br />
of the regulator must be guaranteed.<br />
Without independence, the credibility of<br />
the regulator will suffer and will not be<br />
effective. An important issue in this respect<br />
is the independence of the regulator in its<br />
relationship with the Government. It is<br />
advisable to demarcate the turf between<br />
the Government and the regulator in the<br />
statute itself. While the Government<br />
should have the authority to make policy<br />
decisions, which will be binding on the<br />
regulator, the regulator should be allowed<br />
adequate degree of freedom to effectively<br />
discharge its duties within the policy<br />
framework. The regulator’s survival<br />
should not be dependent upon the<br />
pleasure of the Government and its<br />
independence should be guaranteed by<br />
law and respected by everyone. This<br />
independence should not be absolute but<br />
subject to the laws of the land and policy<br />
of the Government. A regulator should<br />
have the understanding that it is not a<br />
substitute for the Government but has been<br />
established to perform a set of functions<br />
under the statute creating it.<br />
Two Powers of the Government<br />
There are two powers of the Government<br />
which could prejudice the independence<br />
and autonomy of the regulator. One is<br />
the power to issue policy directives to<br />
the regulator. This power, in some cases,<br />
is incorporated in the statute creating the<br />
regulator. For instance, the Competition<br />
Act, 2002, the Electricity Regulatory<br />
Commission Act, 1998, the Telecom<br />
Regulatory Authority of India (TRAI)<br />
and the Tariff Authority for Major Ports<br />
(TAMP) in India incorporate such<br />
provisions. The policy directives are<br />
usually binding on the regulator even<br />
though as in Section 55 of the<br />
Competition Act, 2002, a mechanism is<br />
laid down for consultations, with the<br />
Competition Commission of India being<br />
given an opportunity to express its views<br />
before any directive is issued by the<br />
Government. Notwithstanding the<br />
possibility of this power to give directives<br />
to the regulator prejudicing the<br />
independence of the regulator, one has<br />
to contend with the axiom that the<br />
Government should have the prerogative<br />
to make policy decisions of a binding<br />
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nature on the regulator. The policy<br />
decisions should be confined to nontechnical<br />
and non-administrative areas<br />
and not to individual cases that may<br />
come up before the regulator.<br />
The Standing Committee of the Parliament<br />
in India, after examining the Electricity Bill,<br />
2001 recommended 5 that the Central<br />
Government or the State Government as<br />
the case may be, should have the power to<br />
give policy directives to the regulator.<br />
While cautioning the Government that this<br />
power should be sparingly used, it<br />
suggested that all policy directives should<br />
be laid on the table of the House.<br />
B-219<br />
The second power relates to the power of<br />
superseding the regulator by the<br />
Government. Any power of supersession<br />
severely undermines the independence<br />
of the regulator. This kind of a power<br />
could be capable of being abused, if the<br />
Government finds that some incumbent<br />
regulator is inconvenient or that he is not<br />
willing to get pressurised in an<br />
individual case or cases. Supersession<br />
power is very pernicious in character and<br />
has no justification.<br />
The TRAI supersession described in Box<br />
3 is an illustration.<br />
Supersession of TRAI<br />
Box 3<br />
Telecom Regulatory Authority of India (TRAI) was established under the<br />
TRAI Act, 1997. The Act protected the Members of the Authority, as their<br />
removal was subject to proven guilt in a judicial probe. In September 1999,<br />
TRAI said that the pricing of cellular phone calls should shift to a “calling<br />
party pays” regime, that calls from fixed phones to mobile phones would<br />
be charged at slightly more than the prevailing rates and that mobile<br />
subscribers would stop paying for incoming calls. This is a standard<br />
practice in most countries. A turf war broke up between the Governmentowned<br />
Department of Telecommunications and TRAI. The Department<br />
of Telecommunications was the biggest service provider followed by<br />
Mahanagar Telecom Nigam Limited (MTNL), a Government enterprise.<br />
MTNL argued that higher call rates were anti-people and proceeded to<br />
challenge TRAI’s jurisdiction. The Court, which adjudicated on the issue<br />
of jurisdiction, found TRAI’s powers limited and insufficient to ask for a<br />
shift in pricing regimes. The Court also observed that TRAI could only<br />
make recommendations to the government, which would then decide<br />
what was to be done.<br />
The position therefore was that the TRAI could only set caps in a given<br />
pricing structure and determine as to how the various operators would<br />
share revenues and that it had no say in disputes between operators. The<br />
upshot of this was that the Government scrapped the TRAI Act and<br />
sacked the incumbent Chairperson and the Members and decided to<br />
rewrite the TRAI law to create a pliant well-behaved TRAI. In the newly<br />
written law, TRAI Act, 2000 Government empowered itself with the power<br />
of superseding the Authority in certain situations and of terminating the<br />
tenure of the Chairperson and the Members. The Damocles’ sword of<br />
supersession raises the concern that the regulator may not behave<br />
independently of the Government and may be tempted to toe its line in<br />
the interest of its own survival.<br />
5 See http://164.100.24.208/debate/debtext.asp<br />
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Fixed Tenure<br />
The second element in institutional<br />
independence is the fixed tenure of the<br />
head of the institution and its members.<br />
The factor “fixed tenure” needs to be<br />
viewed as a larger factor including the<br />
various parameters that govern the<br />
selection, appointment and removal of<br />
the head and members of the<br />
institutional regulator. Such parameters<br />
include:<br />
(a) transparent selection process,<br />
(b) clearly stipulated qualifying and<br />
disqualifying criteria for selection,<br />
(c) prescribed tenure,<br />
(d) removal from office of the head and<br />
the members of the regulator on<br />
specific grounds.<br />
For the institutional regulator to be<br />
independent, effective and efficient, there<br />
is an unalloyed need to have a<br />
transparent selection procedure for<br />
selecting the people who will man the<br />
regulator as its head and members.<br />
Furthermore, the qualifications,<br />
experience and knowledge that should<br />
inform the selection will have to be clearly<br />
spelt out and the net cast wide to secure<br />
the right type of persons to constitute the<br />
regulator. If favouritism and patronage<br />
could be minimised, if not eliminated, in<br />
the selection, that itself would be a step<br />
forward in not only ensuring that merit<br />
would have the final say in the selection<br />
but also in ensuring independence of the<br />
institutional regulator. If those manning<br />
the institution are selected purely on<br />
merit considerations and suitability, they<br />
would not feel beholden to the Minister<br />
or the Executive for their appointment<br />
with the corollary that they would<br />
discharge their duties independently,<br />
independent of the pressures that may<br />
be brought on them by Government<br />
functionaries.<br />
There are different selection processes in<br />
different countries. By and large, the<br />
appointments of regulators are made by<br />
the Government. In the US and<br />
144<br />
Argentina, the Executive and the<br />
legislator jointly decide the appointment<br />
of regulators. The Executive selects the<br />
regulator in UK. In some countries, a<br />
collegium selection process is provided<br />
in the statutes creating the regulator.<br />
Hereagain, there could be differences on<br />
whether the collegium selection is<br />
binding on the Executive or otherwise.<br />
In order to get the right persons to man<br />
the regulator and to minimise<br />
favouritism, patronage and politicisation<br />
of appointments, the collegium selection<br />
process is desirable. The collegium itself<br />
needs to be constituted rationally with<br />
experts in the relevant field and with men<br />
of eminence and integrity. The collegium<br />
should be enjoined to make its<br />
recommendations to the Government<br />
(Executive), which desirably should be<br />
binding on the latter. For attracting the<br />
best available talent in the field (of the<br />
institutional regulator), the selection<br />
process should be transparent. This<br />
could be achieved through open<br />
advertisements, scrutiny of the<br />
applications and preparation of a panel<br />
of names by the collegium and finally,<br />
appointment by the Executive.<br />
As indicated earlier, Government would<br />
generally be not inclined to loosen its<br />
control over appointments of the<br />
Chairperson and Members of the<br />
regulator. The High level Committee<br />
(2000) appointed by the Department of<br />
Company Affairs to suggest a new<br />
competition law for India had advised<br />
the collegium selection approach and<br />
indeed, the Draft Bill of the law provided<br />
for the collegium. But when the Bill was<br />
taken up for discussion in the<br />
Parliament, Government chose to delete<br />
the collegium provision and ultimately<br />
when Competition Act, 2002 was passed<br />
by the Parliament, it was sans the<br />
collegium provision (this was before the<br />
2007 amendments to the 2002 version).<br />
Political considerations and the<br />
penchant for the Government to keep the<br />
reins in its hand for the appointment of<br />
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the persons constituting the regulator are<br />
likely to have impelled the deletion of the<br />
said provision from the Bill.<br />
CUTS (2006a) in its Discussion Paper,<br />
had suggested, inter alia, that:<br />
(a) a panel should be constituted to<br />
recruit capable personnel for<br />
manning independent institutions.<br />
(b) such a panel should be comprised<br />
of renowned and undisputed<br />
personalities with diverse<br />
expertise.<br />
(c) one-third members of this panel<br />
should be replaced every alternate<br />
year.<br />
(d) the extension of the tenure should<br />
also be decided by the same panel.<br />
There are practical difficulties in<br />
adopting the collegium approach<br />
because of political reasons and<br />
bureaucratic constraints but India is<br />
progressing towards accepting this<br />
approach as is evidenced in the statute<br />
establishing the National Human Rights<br />
Commission. In the area of competition<br />
law, Competition Act, 2002 was amended<br />
in 2007 incorporating the collegium<br />
selection procedure.<br />
Most statutes relating to institutional<br />
regulators stipulate fixed tenures for the<br />
head and members thereof. In India, the<br />
tenure is five years for the regulatory<br />
authorities in the power and port sectors.<br />
In the telecom sector, the tenure is three<br />
years. The Chairman and Members of the<br />
Monopolies and Restrictive Trade<br />
Practices Commission had five year<br />
tenure, which was renewable with an age<br />
cap of 65 years. The renewability clause<br />
is not in all statutes in India but is in<br />
some countries like Canada, Argentina<br />
and Israel. A rational approach to this<br />
issue of renewability is that the statutes<br />
would do well to have a provision for<br />
re-appointment of the head and the<br />
members through the prescribed<br />
selection process along with other<br />
candidates. The logic in support of this<br />
approach is that the expertise gained<br />
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during the tenure of an incumbent head<br />
or member could be effectively utilised<br />
further. This should be, of course, subject<br />
to the age cap prescribed. It is suggested<br />
that there should be a uniform age cap<br />
for the head and members of the<br />
institutional regulator and that there<br />
should be no difference in the age caps<br />
between them.<br />
Section 10 of the Act prescribes the age<br />
cap for the Chairperson and Members of<br />
the CCI at 65 years. In respect of the<br />
Competition Appellate Tribunal,<br />
Section 53F thereof prescribes age caps<br />
for the Chairperson at 68 years and for<br />
the Members at 65 years.<br />
Removal<br />
Removal of a regulator incumbent should<br />
not be arbitrary. Legislation in several<br />
countries provides an authority with<br />
powers to remove from office a Member<br />
of the regulator that has engaged in<br />
certain actions or has become unfit for<br />
the post. In Mexico, a regulator<br />
incumbent can be removed on charges of<br />
severe misdemeanour under criminal or<br />
labour legislation (Mexico, 1992). The<br />
incumbent can also be sentenced for<br />
abusing one’s position. Imprisonment is<br />
a cause for removal in Thailand<br />
(Thailand, 1979).<br />
The commonly noted grounds for<br />
removal of an incumbent Chairperson or<br />
Member of a regulator are that he/she:<br />
(1) is adjudged as an insolvent<br />
(2) has engaged during his/her term<br />
of office, in any paid employment<br />
(3) has been convicted of an offence<br />
involving moral turpitude<br />
(4) has acquired such financial or<br />
other interest that is likely to<br />
prejudice his/her functions<br />
(5) has abused his/her position as to<br />
render his/her continuance in office<br />
prejudicial to public interest, or<br />
(6) has become physically or mentally<br />
incapable of functioning in office.<br />
145
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The TRAI Act, 2000 provides for the<br />
removal of the Chairperson or Members<br />
on account of their being prejudicial to<br />
public interest but before their removal,<br />
they would be given a reasonable<br />
opportunity to be heard. However, the<br />
Members of the Appellate Tribunal can<br />
be removed only in case of proven guilt<br />
by a Supreme Court enquiry. The removal<br />
of Commissioners under the Electricity<br />
Regulatory Commission Act, 1998 is<br />
allowed on the usual grounds listed<br />
above but it is subject to proven guilt after<br />
proper enquiry. The Chairperson and<br />
Members under the Securities and<br />
Exchange Board of India, Act, 1992 can<br />
face termination of their services after<br />
being served with a three months notice<br />
or after being paid the salary for the same<br />
period.<br />
Bar on Employment<br />
Independence of institutional regulators<br />
may be strengthened, if the incumbents<br />
thereof are debarred from seeking and<br />
accepting appointments in the<br />
enterprises that fall within the ambit of<br />
the statutes creating them. The bar could<br />
be for atleast one year and not more than<br />
two years. The period of the bar is rather<br />
subjective, but for practical purposes, the<br />
bar should operate for atleast one year,<br />
so as to obviate the possibility of the<br />
incumbent functionary from passing an<br />
order in favour of a party to a case and<br />
from getting rewarded with an<br />
employment on a good remuneration on<br />
demitting office. Optimally, a two year<br />
ban may be in order, as the heat of<br />
adjudicating in favour of a party in order<br />
to reap a benefit would likely evaporate<br />
in the two year cooling off period.<br />
The regulators should not also seek or<br />
accept employment even directly in the<br />
Government in the interest of functional<br />
independence of the regulators. It has<br />
been noted earlier that regulators have<br />
the responsibility to ensure a balance<br />
between the interests of different players<br />
in the market, stakeholders and<br />
enterprises including Government. The<br />
bar on employment in enterprises falling<br />
within the pale of the statutes concerned<br />
would go a long way in subserving and<br />
ensuring the independence of the<br />
regulator.<br />
In some countries, legislation requires<br />
that the members of a regulator should<br />
not have interests which would conflict<br />
with the functions to be performed. For<br />
example in Hungary, the members of the<br />
Competition Council cannot pursue<br />
activities for profits other than those<br />
dedicated to scientific, educational,<br />
artistic, authorial and inventive pursuits<br />
as well as activities arising out of legal<br />
relationships (Hungary, 1996). A similar<br />
provision is available in the Mexican<br />
legislation (Mexico, 1993).<br />
Copyright © Dr.S. Chakravarthy<br />
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Analysis of Merger Regulation with Special Emphasis<br />
on the Civil Aviation Industry<br />
Chandrashekhar A.C.* and Sumangala A.C.**<br />
Mergers are a feature of a growing and vibrant economy. Throughout the past<br />
century, there has been proliferation of competition laws across the globe, and<br />
most of these jurisdictions realise the anti-competitive effects a merger may result<br />
into and therefore, they have merger control mechanisms. The Indian<br />
Companies Act does not contain a definition of mergers. In simple terms, a<br />
merger is, for example if there are two companies, A and B, they may merge to<br />
form C or may merge to become B or may merge to become A.<br />
Firms have various reasons to merge and mergers do not necessarily have a negative<br />
impact on the market. In fact, they play a very vital role in growth of the market<br />
and in increasing efficient utilisation of resources. It has to be seen that what is<br />
greater, the anti-competitive aspect or the benefits that will ensue. This is in<br />
nutshell the criteria of all merger review mechanisms. Competition law in India<br />
is a recent phenomenon. Legislative history shows that we have had not much of<br />
the merger control process for examining anti-competitive aspects of mergers.<br />
Competition is the lifeblood of any economy. If there is no competition in the<br />
market, the market will decay. Which is why, competition in the market needs to<br />
be preserved. Competition has two-fold effects on the market, firstly, it is favourable<br />
to the consumer and secondly, it keeps the market efficient, i.e. it generates<br />
productive efficiency, allocative efficiency that leads to better utilisation of<br />
resources and dynamic efficiency that leads to innovation. 1 It favours the consumer<br />
because it ensures that price and the quality of goods and services offered to the<br />
consumer are determined by market forces and not on the whim of the seller,<br />
hence saves the consumer from being exploited. Further, it also serves the freedom<br />
of trade an economic counterpart of political democracy. It preserves pluralism<br />
and distribution of market power thereby countering the concentration of wealth<br />
into a few hands. 2 Not only by modern economists but also by classical economists,<br />
* Student, Final Year, Hidayatullah National Law University, Raipur (Chhattisgarh)<br />
** LL.M., Karnataka State Law University, Dharwad<br />
1 Vinod Dhall, Key Concepts in Competition Law, in COMPETITION LAW TODAY:<br />
CONCEPTS, ISSUES AND THE LAW IN PRACTICE, 3 (Vinod Dhall, ed. 2007)<br />
2 Ibid. at 4<br />
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competition has been fundamental to the price formation of consumers’ goods<br />
and of the land, labour and capital that produce them. A competitive process<br />
equates quantities supplied and demanded and sets the prices at equilibrium or<br />
near equilibrium levels. Moreover, it apportions capital and labour amongst<br />
entrepreneurs so that the expected rate of return is almost equal among different<br />
users. Modern economists also recognise it as a process for economic growth. For<br />
example, Von Hayek argues that it is only through competition producers may<br />
know what the most efficient methods are; he calls it a process of creative destruction<br />
that revolutionises the economic structure from within, incessantly destroying<br />
the old one, incessantly creating a new one.<br />
1. Regulation of Mergers in India<br />
1.1 Legislative Background<br />
1.1.1 Companies Act<br />
Indian law had not paid any significant<br />
attention to the anti-competitive effects<br />
of mergers. The Companies Act, 1956<br />
regulates mergers that are referred to as<br />
“arrangements” under its Sections 390<br />
to 396A but none of its provisions except<br />
Section 394 can be interpreted to have a<br />
control over the anti-competitive impacts<br />
of mergers as it contains a public interest<br />
clause.<br />
1.1.2 Monopolies and Restrictive Trade<br />
Practices (MRTP) Act<br />
The Competition law regime under the<br />
MRTP Act dealt with Mergers under<br />
Sections 23 and 24, these provisions were<br />
however omitted in 1991. They only<br />
required that what was necessary to be<br />
examined was that the proposed scheme<br />
of merger or takeover was not likely to<br />
lead to the concentration of economic<br />
power to the common detriment or was<br />
not likely to be prejudicial to public<br />
interest in any manner. The power to<br />
approve a merger vested in Central<br />
Government and no merger review<br />
process was prescribed. 3<br />
1.1.3 Takeover Code<br />
The Takeover Code requires an acquirer<br />
of shares which (taken together with his<br />
existing shares or voting rights) would<br />
entitle him to more than five per cent of<br />
the shares or voting rights in the target<br />
company, to make disclosures to the<br />
target company and to the stock<br />
exchanges where the shares of the target<br />
company are listed.<br />
The acquirer(s) is also required to make<br />
a public announcement in case he<br />
acquires shares or voting rights (taken<br />
together with his existing shares of<br />
voting rights) that would entitle him to<br />
15 per cent or more of the voting rights in<br />
the target company. The Takeover Code<br />
also restricts consolidation of holdings<br />
and indirect acquisition of control over<br />
the target company without making a<br />
public announcement. Takeover Code<br />
applies only to listed companies.<br />
2. Merger Control Framework In India<br />
2.1 Regulation of Combinations<br />
Currently, the merger control framework<br />
in India consists of two sections of the<br />
Competition Act, 2002, Sections 5 and 6.<br />
Mergers are covered under the broad<br />
head “combinations” under the scheme<br />
of the Act. A combination is defined as<br />
3 T. Ramappa, Competition Law In India: Issues, Policies And Development, 187 (1 st ed. 2006<br />
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acquisition of control, shares, voting<br />
rights or assets, acquisition of control by<br />
a person over an enterprise where such<br />
person has control over another<br />
enterprise engaged in competing<br />
businesses, and mergers and<br />
amalgamations between or amongst<br />
enterprises when the combining parties<br />
exceed the thresholds set in the Act.<br />
The thresholds set under the Act<br />
contained in Section 5 are based upon<br />
combined assets/turnover of the<br />
combining parties, they are:<br />
(a) Combined assets of the enterprises<br />
value more than Rs. 1,000 crores or<br />
combined turnover is more than<br />
Rs. 3,000 crores. In case either or<br />
both of the enterprises have assets/<br />
turnover outside India also, then<br />
the combined assets of the<br />
enterprises value more than<br />
US$ 500 million, including at least<br />
Rs. 500 crores in India, or turnover<br />
is more than US $ 1500 millions,<br />
including at least Rs. 1,500 crores<br />
in India.<br />
(b) Combined assets of the group to<br />
which the acquired enterprise<br />
would belong being more than<br />
Rs. 4,000 crores or such group<br />
having a joint turnover more than<br />
Rs. 12,000 crores after acquisition<br />
or merger. In case such group has<br />
assets/turnover outside India, then<br />
the combined assets of the group<br />
value more than US$ 2 billion,<br />
including at least Rs. 500 crores in<br />
India or turnover is more than<br />
US$6 billion including at least<br />
Rs. 1,500 crores in India. Group is<br />
defined in the Act as two<br />
enterprises belong to a “group” if<br />
one is in position to exercises at<br />
least 26 per cent voting rights,<br />
appoint at least 50 per cent of the<br />
directors, or controls the<br />
management or affairs in the other.<br />
The Act also provides for revision of the<br />
threshold limits every two years by the<br />
government, in consultation with the<br />
Commission, through notification, based<br />
on the movement in Wholesale Price<br />
Index (WPI) or fluctuations in exchange<br />
rates of rupee or foreign currencies.<br />
2.2 Procedure under the Merger Control<br />
The Competition Act, 2002 calls for a<br />
mandatory pre-merger notification to the<br />
Competition Commission of India (CCI)<br />
of combinations that exceed the<br />
prescribed threshold. And in case a<br />
notifiable merger is not notified, the CCI<br />
has the option to inquire into it within<br />
one year of the taking into effect of the<br />
merger. In case such an inquiry finds<br />
appreciable adverse effect on<br />
competition, the Commission may have<br />
to order the costly process of demerger.<br />
To impose, its pre-merger notification<br />
provisions therefore, the CCI is<br />
authorised to impose a fine which may<br />
extend to one per cent of the total turnover<br />
or the assets of the combination,<br />
whichever is higher.<br />
The time limit prescribed for notifying the<br />
proposed combination with all relevant<br />
details is 30 days of the approval of such<br />
proposal by the board of directors or of<br />
the execution of any agreement or other<br />
document. Thus, the regulations propose<br />
to permit parties to notify the CCI anytime<br />
after they can demonstrate a bona fide<br />
intention to combine.<br />
Further, the proposed combination<br />
cannot take effect for a period of 210 days<br />
from the date it notifies the Commission<br />
or till the Commission passes an order,<br />
whichever is earlier. If the Commission<br />
does not pass an order during the said<br />
period of 210 days the combination shall<br />
be deemed to have been approved.<br />
Exemptions to pre-merger notification have<br />
been granted under Section 6(4) to the share<br />
subscription or financing facility or any<br />
acquisition, inter alia, by a public financial<br />
institution, foreign institutional investor,<br />
bank or venture capital fund, pursuant to<br />
any covenant of a loan agreement or<br />
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investment agreement. However, they are<br />
required to make disclosure to the<br />
Commission within seven days by way of<br />
filing details of such transactions.<br />
In furtherance of the notification, if the<br />
Commission is prima facie of the opinion<br />
that a combination has caused or is likely<br />
to cause adverse effect on competition in<br />
Indian markets, it shall issue a notice to<br />
show cause to the parties as to why<br />
investigation in respect of such<br />
combination should not be conducted.<br />
On receipt of the response, if Commission<br />
is of the prima facie opinion that the<br />
combination has or is likely to have<br />
appreciable adverse effect on<br />
competition, it may direct publication of<br />
details of combination, inviting<br />
objections from the public, affected or<br />
likely to be affected by the proposed<br />
combination, and call for additional or<br />
other information from parties to the<br />
combination, if considered appropriate.<br />
Section 30 of the Act deals with cases<br />
when notification has been received by<br />
CCI, while Section 29 deals with cases<br />
when CCI is to act on basis of information<br />
received by it. When this is the case, CCI<br />
has to notify the parties of its intention to<br />
investigate into the matter. In order to<br />
conduct inquiry into combinations, the<br />
CCI has to first identify the relevant<br />
market, product and/or geographical<br />
market. Thereafter, it analyses if the<br />
merger has an appreciable adverse effect<br />
of competition in the relevant market and,<br />
then it has to decide whether to approve,<br />
or approve with modifications in the<br />
scheme or reject the scheme of merger.<br />
2.3 Factors for determining appreciable<br />
adverse effects:<br />
For analysing the appreciable adverse<br />
effect on competition in the market, the<br />
CCI considers the factors contained in<br />
Section 20(4) of the Act, they are:<br />
(a) actual and potential level of<br />
competition through imports in the<br />
market;<br />
(b) extent of barriers to entry into the<br />
market;<br />
(c) level of concentration in the market;<br />
(d) degree of countervailing power in<br />
the market;<br />
(e) likelihood that the combination<br />
would result in the parties to the<br />
combination being able to<br />
significantly and sustainably<br />
increase prices or profit margins;<br />
(f) extent of effective competition likely<br />
to sustain in a market;<br />
(g) extent to which substitutes are<br />
available or are likely to be<br />
available in the market;<br />
(h) market share, in the relevant<br />
market, of the persons or enterprise<br />
in a combination, individually and<br />
as a combination;<br />
(i) likelihood that the combination<br />
would result in the removal of a<br />
vigorous and effective competitor<br />
or competitors in the market;<br />
(j) nature and extent of vertical<br />
integration in the market;<br />
(k) possibility of a failing business;<br />
(l) nature and extent of innovation;<br />
(m) relative advantage, by way of the<br />
contribution to the economic<br />
development, by any combination<br />
(n) having or likely to have<br />
appreciable adverse effect on<br />
competition;<br />
(o) Whether the benefits of the<br />
combination outweigh the adverse<br />
impact of the combination, if any.<br />
Thus, after consideration of all the above<br />
listed factors mergers are either<br />
approved, modified or rejected. This<br />
order is passed under Section 31 of<br />
the Act.<br />
Considering the positive impacts mergers<br />
have in the market, they are not always<br />
held up for their anti-competitive effects,<br />
they are remedied. There exists provision<br />
for both structural as well as behavioural<br />
remedies under the scheme for<br />
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minimising or eliminating the anticompetitive<br />
effects of mergers. A<br />
behavioural remedy though difficult to<br />
implement is preferable. A structural<br />
remedy is easier to implement as it<br />
would entail requiring the merged<br />
enterprise to make structural adjustment<br />
which could be in the form of sale of<br />
assets, divestment of a division or a unit<br />
or creation or strengthening of<br />
competitors through, for example,<br />
licensing of an Intellectual Property<br />
Right (IPR). It is only when no remedy is<br />
available or feasible that mergers are to<br />
be prohibited.<br />
A provision for appeal is also there under<br />
Section 53 of the Act. Competition<br />
Appellate Tribunal (CAT) is to hear and<br />
dispose of appeals against any direction<br />
issued or decision made or order passed<br />
by the Commission under specified<br />
sections of the Act, such as orders relating<br />
to notification of combination, inquiry by<br />
the Commission and penalties. The time<br />
limit for filing an appeal is 60 days of<br />
receipt of the order/direction/decision of<br />
the Commission.<br />
2.4 Draft Regulations 4<br />
The CCI has recently published new draft<br />
guidelines for regulation of combinations<br />
utilizing its power under Section 64 and<br />
Section 6(2) and 6(5); they are yet to be<br />
notified in the gazette of India. It has been<br />
proposed to name them as Competition<br />
Commission of India (Procedure in regard<br />
to the transaction of business relating to<br />
combination) Regulations, 2011.<br />
Some key features of the draft regulations<br />
are:<br />
(a) Consultation prior to filing notice<br />
of proposed combination<br />
Parties to a proposed combination<br />
may make written request seeking<br />
informal and verbal consultation<br />
with the CCI about filing notices.<br />
However, CCI would not be bound<br />
by any opinion or view expressed<br />
during consultation.<br />
(b) Forms of notice<br />
The draft regulations prescribe 3<br />
formats of pre- merger notification<br />
Forms for obtaining approval.<br />
Form I<br />
For categories of following<br />
combinations: 5<br />
(i) Acquisition of not more than 15 per<br />
cent of the total shares or voting<br />
rights of the target company, solely<br />
as investment or in the ordinary<br />
course of business, not leading to<br />
control;<br />
(ii) Acquisition of shares or voting<br />
rights of the target company where<br />
the acquirer is already in control;<br />
(iii) Acquisition of assets not directly<br />
related to the business activity of<br />
the acquirer or made solely as<br />
investment or in the ordinary<br />
course of business not leading to<br />
control of the enterprise except<br />
where the assets being acquired<br />
represent the entire business<br />
operations of the target company<br />
in a particular location or particular<br />
product or services, irrespective of<br />
whether such assets are organised<br />
as a separate legal entity or not;<br />
(iv) Acquisition or acquiring of control<br />
or merger or amalgamation where<br />
not more than one party to the<br />
combination has in India assets of<br />
more than INR 2.5 billion or turnover<br />
of more than INR 7.5 billion;<br />
(v) Acquisition of stock-in-trade, raw<br />
materials, stores and spares in the<br />
ordinary course of business;<br />
4 Can be accessed at, http://www.competition-commission-india.nic.in/regulations/<br />
ConsolidatedCCI-CombinationRegulation%20200_Revised30062008.pdf<br />
5 Ibid<br />
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(vi) Amended or renewed tender offer<br />
where a notice has been filed by the<br />
party making the offer prior to such<br />
amendment or renewal of the offer,<br />
provided that prior intimation of<br />
such change has been duly made;<br />
(vii) Acquisition of shares or voting<br />
rights by a securities underwriter,<br />
in the ordinary course of business<br />
and in the process of underwriting;<br />
(viii) Acquisition of shares or voting<br />
rights pursuant to a bonus issue or<br />
sub-division of shares; and<br />
(ix) Acquisition of control, shares,<br />
voting rights, or assets by one<br />
person or enterprise of another<br />
person or enterprise within the<br />
same group.<br />
Form II<br />
For combinations other than those<br />
listed above in Form I. 6<br />
Form III<br />
For public financial institutions,<br />
foreign institutional investors, banks<br />
and venture capital funds in respect<br />
of share subscription or financing<br />
facility or any acquisition made by<br />
them pursuant to any covenant of a<br />
loan agreement or investment<br />
agreement.<br />
2.4.1 Liability to file notice<br />
In case of merger or amalgamation, the<br />
liability to file pre-merger notifications<br />
is on the parties to jointly file notice. In<br />
case of acquisition or acquiring of control,<br />
the liability is on the acquirer.<br />
2.4.2 Filing Fees<br />
In case of merger, amalgamation,<br />
acquiring of control over an enterprise,<br />
the fees for filing Form I, or Form II is<br />
INR 4 million. In case of acquisition of<br />
shares, voting rights or assets of the target<br />
company, the fees shall depend upon the<br />
value of the acquisition as under:<br />
Value of Acquisition<br />
Less than INR 5 billion<br />
From INR 5 billion to<br />
less than INR 10 billion<br />
INR 10 billion and above<br />
Fee<br />
INR 1 million<br />
INR 2 million<br />
INR 4 million<br />
2.4.3 Prima facie view<br />
Upon filing of the pre-merger<br />
notification, the CCI shall form its prima<br />
facie opinion on the proposed<br />
combination within 30 days of filing of<br />
notice.<br />
2.4.4 Time period for review<br />
The draft regulations provide that CCI<br />
shall endeavour to pass an order or issue<br />
directions within 180 days of filing of<br />
the notice. The Act however currently<br />
prescribes a period of 210 days within<br />
which the CCI has to pass order or issue<br />
directions otherwise, the combination<br />
would be deemed as having been<br />
approved.<br />
2.4.5 Appointment of independent<br />
agencies to oversee modifications<br />
The draft regulations give power to CCI<br />
to appoint independent agencies if it is<br />
of the opinion that modifications<br />
proposed by it and accepted by the<br />
parties needs supervision. Such<br />
independent agencies may include an<br />
accounting firm, management<br />
consultancy, any professional<br />
organisation or independent practitioner<br />
of repute.<br />
2.4.6 Request for confidentiality<br />
Any party may submit a written request<br />
for confidentiality of documents<br />
submitted during investigation on the<br />
basis of cogent reasons, viz. making part<br />
6 Ibid<br />
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or whole of the document public would<br />
result in disclosure of trade secrets or<br />
destruction or appreciable diminution of<br />
commercial value of any information or<br />
cause serious injury which would be<br />
subject to consideration by CCI. The right<br />
to seek confidentiality extends only to<br />
documents submitted and not to the<br />
transaction itself.<br />
3. Background Of The Aviation Sector<br />
Civil Aviation plays an integral role in<br />
development of an economy. It helps in<br />
realizing the socio-economic objective of<br />
providing connectivity to foster travel<br />
and trade. As per International Civil<br />
Aviation Organisations’ estimates, every<br />
100 $ spent on air travel produces<br />
benefits worth 325 $ to the Economy. It<br />
generates 100 additional jobs in air<br />
transport and 610 related jobs. 7<br />
The air transport sector in India has<br />
undergone massive changes in the last<br />
decade. The Air Corporation Act 1953<br />
led to nationalisation of the airlines<br />
services. Consequently, the assets of nine<br />
existing companies were transferred to<br />
two entities in the aviation sector<br />
controlled by the Government of India –<br />
Indian Airlines and Air India. For many<br />
years, air travel in India was perceived<br />
as an elitist activity and there was<br />
restricted growth in the industry.<br />
In 1986, private sector players were<br />
permitted as air taxi operators. This led<br />
to entry of Jet, Air Sahara, NEPC, East-<br />
West & Modiluft. With the passing of the<br />
Air Corporation Act, 1994, this sector<br />
was opened up and private carriers were<br />
permitted to operate scheduled services.<br />
While six operators were granted licence<br />
only Jet and Air Sahara were able to start<br />
their services.<br />
However, the year 2003 marked a<br />
watershed in the history of civil aviation<br />
in India with the entry of low cost carriers<br />
like Air Deccan and Spice Jet. This was<br />
followed by entry of other private airlines,<br />
large and small on to the market,<br />
including Kingfisher Airlines,<br />
Paramount and Go Air. 8<br />
From the year 2003 onwards, the<br />
perception of air travel changed. Aviation<br />
became more affordable. There has been<br />
a large increase in passenger traffic. Also,<br />
there has been intense price competition<br />
that has resulted in discounted fares,<br />
promotional offers and introduction of<br />
flights to newer destinations. The<br />
co-existence of full service carriers and<br />
low cost carriers has also given the<br />
consumer a wide choice of service on the<br />
market. The factors that led to the growth<br />
in Aviation sector are Increase in<br />
Consumerism; Rising Disposable<br />
incomes; Rising Middle Class<br />
Population; Untapped Market;<br />
Increasing Business Travel; Increasing<br />
Tourists Travel; Entry of Low Cost<br />
Carriers; Increasing Competition;<br />
Government Reform Measures. 9<br />
The intense price competition also led to<br />
losses for the airlines. The total industry<br />
losses for the year 2006-07 were over USD<br />
500 million. As a result, the market<br />
structure in the air transport sector is<br />
undergoing rapid changes. There appear<br />
to be major corporate restructuring<br />
measures underway in this sector mainly<br />
in the form of mergers and acquisitions<br />
7 Nancy Shah, Competition Issues in the Civil Aviation Sector Evaluating Competition related<br />
issues pertaining to the Indian Airlines’ Industry, with Special Reference to M&A in light of<br />
Competition Act, 2002 can be accessed at, www.cci.gov.in/images/.../F1_NancyShah<br />
_20080411102237.pdf<br />
8 Competition Issues in the Air Transport Sector in India, can be accessed at, http://www.cci<br />
.gov.in/images/media/completed/transport_20090421133744.pdf<br />
9 www.marketresearch.com/map/prod/1482657.html<br />
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(M&A’s). The recent mergers of Indian<br />
Airlines and Air India, Kingfisher and<br />
Air Deccan and Jet and Sahara have led<br />
to an industry structure which is<br />
sufficiently concentrated to raise a<br />
fundamental question about whether the<br />
operation of market forces are adequate<br />
to prevent the abuse of market power. The<br />
changing market structure has provided<br />
a new competitive dimension to the<br />
industry. It is expected that as a result of<br />
the M&As taking place and resultant<br />
scale economies, efficiency and<br />
productivity will increase, thereby<br />
leading to enhancement of profits. It is in<br />
fact argued that such consolidation is<br />
needed in order to ensure efficient and<br />
sustained functioning of the airline<br />
operators. However, as a result of the<br />
M&A’s, the nature of the market, which<br />
was earlier open to many players thereby<br />
enhancing competitiveness, is now<br />
changing. It is perceived that this may<br />
lead to anti-competitive practices on the<br />
market with some large players<br />
dominating the market.<br />
4. Defining Relevant Market<br />
The competition assessment of M&A’s<br />
in the air transport sector is generally<br />
more complex than in many other<br />
economic sectors because of the nature<br />
of the industry. The role of the<br />
Competition Commission becomes<br />
important in the current scenario in this<br />
sector in the sense, that there is need for<br />
assessing whether the changing market<br />
scenario and the benefits of the<br />
combinations in terms of “efficiency<br />
mergers” outweigh the costs or adverse<br />
effects in terms of anti-competitiveness.<br />
Thus, while on the one hand,<br />
combinations like M&A’s currently<br />
occurring in the sector may improve<br />
efficiency in the sector in the form of<br />
higher productivity and lower costs, on<br />
the other, they may lead to abuse of<br />
market power and anti-competitive<br />
effects. 10<br />
To evaluate, the competition concerns,<br />
the first step is to determine the relevant<br />
market. Relevant product Market is<br />
defined as a market comprising of all<br />
those products and services which are<br />
regarded as interchangeable or<br />
substitutable by the consumer, by reason<br />
of characteristics of the products or<br />
services; their price and intended use. 11<br />
An analysis of nature of competition in<br />
the airline industry starts with<br />
identification of the set of services the<br />
industry provides and the nature of<br />
demand for those services. Broadly<br />
speaking the airline industry provides<br />
air transport services, which is divided<br />
into two categories – passengers and<br />
freight (cargo). However, the focus of<br />
Competition analysis shall only be<br />
passenger services.<br />
There are basically two separate<br />
categories of travellers:<br />
one which is time sensitive who is<br />
travelling for business purposes<br />
whose opportunity cost of time is very<br />
high and the second category which<br />
is the leisure travellers whose<br />
opportunity cost of time is not very<br />
high and their price elasticity of<br />
demand is very high. 12 The leisure<br />
travellers are highly responsive to<br />
price changes unlike the business<br />
travellers who have a strict preference<br />
for time, day of travel and non-stop<br />
10 Sunil Barthwal, Airline mergers and competition, The Financial Express, 30 th March, 2007.<br />
11 Section 2 of Competition Act, 2002<br />
12 OECD Report on AIRLINE MERGERS AND ALLIANCES, Directorate for Financial, Fiscal<br />
And Enterprise Affairs Committee on Competition Law and Policy, DAFFE/CLP(2000)1,<br />
at 26, http://www.oecd.org/daf/clp<br />
154<br />
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routings versus indirect routings. 13<br />
The competition concerns are<br />
basically in the context of non-flexible<br />
class of passengers. Thus, under the<br />
non-flexible class non-stop, city pair<br />
wise flights at a particular time of a<br />
specific day is the relevant market. 14<br />
The methodology outlined by the<br />
Competition Assessment Framework<br />
(CAF) 15 has been followed.<br />
Key questions for the assessment include<br />
the following 16<br />
(a) Has there been much market entry<br />
in the past and how successful has<br />
it been?<br />
(b) Does a single airlines or a group of<br />
airlines account for a substantial<br />
part of the market?<br />
(c) Does the market structure suggest<br />
that the competition may be<br />
limited?<br />
The methodology involves the following:<br />
(a) An assessment of the percentage of<br />
traffic in selected routes on specific<br />
dates and specific time slots<br />
(b) Share of airlines in the above routes<br />
(c) Computation of four firm<br />
concentration ratios<br />
(d) On the basis of the above, analysis<br />
of whether, there is evidence of<br />
domination in certain routes.<br />
(e) Analysis of time slots available to<br />
airlines<br />
(f) Factors governing allocation of time<br />
slots<br />
(g) Slot arrangements between merged<br />
airlines. 17<br />
Further, to assess the degree of<br />
competition within a market, a standard<br />
measure which can be used is the<br />
Herfindahl index. 18 The Herfindahl index<br />
is a measure of the size of the firms in<br />
relation to the industry and is an<br />
indicator of the amount of competition<br />
among them. It is defined as the sum of<br />
the squares of the market shares of each<br />
individual firm. As such, it can range<br />
from 0 to 10,000 moving from a large no.<br />
of amount of very small firms to a single<br />
monopolistic producer. Decreases in the<br />
Herfindahl index generally indicate a<br />
loss of pricing power and an increase in<br />
competition, whereas increases imply the<br />
opposite. Competition authorities often<br />
use a scale such as the following to<br />
assess the significance of the HHI,<br />
particularly in relation to mergers.<br />
(a) An HHI of less than 1,000 is low,<br />
and there are no concerns about<br />
market concentration.<br />
(b) An HHI between 1,000 and 1,800<br />
is moderate, and competition<br />
concerns are not considered likely.<br />
(c) An HHI above 1800 is high, and<br />
might raise competition concerns.<br />
4.1 Important Mergers in India<br />
4.1.1 The Jet-Sahara Mega Merger<br />
On 20 th April, 2007, Jet acquired 100 per cent<br />
stake in Air Sahara 15 months after signing<br />
the original purchase agreement. Jet<br />
13 Berry, Steven, Carnall, Michael and Spiller, Pablo, “Airline Hubs: Costs, Markups 5 and the<br />
Implications of Customer Heterogeneity,” NBER Working Paper 5561, May 1996<br />
14 Competition Issues in the Air Transport Sector in India, can be accessed at, http://www.cci<br />
.gov.in/images/media/completed/transport_20090421133744.pdf at p.30<br />
15 http://www.businessenvironment.org/dyn/be/docs/154/Nellist-Annex.pdf<br />
16 Ibid.<br />
17 One may also refer, http://www.cci.gov.in/images/workshop/14_15march07/<br />
14jhon.pdf?phpMyAdmin=NMPFRahGKYeum5F74Ppstn7Rf00<br />
18 http://www.justice.gov/atr/public/testimony/hhi.htm<br />
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purchased its arch rival for INR 14.5 billion<br />
(3500 USD Million) which is 35 per cent<br />
less than the price agreed in 2006. The<br />
ultimate consummation of Sahara<br />
represented the conclusion of the<br />
arbitration exercise that has been going on<br />
since July 2006. The new service would be<br />
under the brand name of “Jetlite” which<br />
would operate as a value carrier.<br />
With the merger in place, the merged<br />
entity with a fleet strength of around<br />
79 aircrafts has around 30 per cent share<br />
of the passenger airline market. The<br />
merged entity will have a major share of<br />
the market as well as of slots on a prime<br />
route such as Delhi-Mumbai which<br />
accounts for nearly 50 per cent of<br />
domestic traffic. Jet would also have<br />
control over the fleet, landing and<br />
parking rights of Air Sahara in some<br />
airports. The merger therefore raises<br />
issues of predatory pricing and<br />
unhealthy competition in the passenger<br />
air transport sector.<br />
4.1.2 The Air Deccan-Kingfisher<br />
Merger<br />
The merger between the pioneer LCC and<br />
liquor baron was announced on<br />
31 st May, 2007 as the United Brewies,<br />
picked up 26 per cent stake in Air Deccan<br />
and propose to buy another 20 per cent<br />
via an open offer. The deal UB group paid<br />
a whopping INR 550 Crore to pick up a<br />
26 per cent stake in the LCC. A number<br />
of synergies are expected as a result of<br />
the merger in terms of engineering,<br />
maintenance and overhaul. The merger<br />
has created an entity with around<br />
80 aircrafts. The move to merge with<br />
Deccan also makes it possible for<br />
Kingfisher to enter the international arena.<br />
Thus, Kingfisher can now conform to<br />
India’s policy which stipulates that<br />
airlines must have five years experience<br />
in the domestic market and a minimum of<br />
20 aircrafts before gaining permission to<br />
fly on international routes. With the<br />
merger, Kingfisher now qualifies to fly<br />
on international routes. The merger is<br />
156<br />
expected to save costs on operations,<br />
maintenance, ground and baggage<br />
handling, feeder services, engineering<br />
and security. However, this also raises<br />
few competition issues. For instance in<br />
the Delhi-Chennai sector, Kingfisher has<br />
taken over the slots of Deccan, post<br />
merger. This raises issues in terms of<br />
pricing. It also raises the issue of<br />
removing a vigorous competitor from the<br />
market through a merger.<br />
4.1.3 The Air India-Indian Merger<br />
The two state run carriers entered into a<br />
merger in April 2007 in a bid to<br />
consolidate and optimise the use of the<br />
assets of the two public sector airlines.<br />
The will help the two airlines to synergise<br />
their operations. The two public sector<br />
companies merged into a single<br />
company called National Aviation<br />
Company in April 2007. The merged<br />
entity will operate on both domestic and<br />
international sectors. The new company<br />
will be among the top ten airlines in Asia<br />
and among the leading 30 airlines<br />
globally in terms of having a fleet of<br />
120+ aircrafts and 34,000 employees<br />
including 1,315 pilots. It is the first<br />
airlines in India to have more than<br />
100 aircrafts. The government has<br />
approved acquisition of new aircrafts -<br />
68 aircrafts by Air India and 43 by Indian<br />
airlines. Major gains that can be reaped<br />
from the merger include economies of<br />
scale in maintenance, ground operations,<br />
use of landing slots and parking rights,<br />
etc. The government owned airlines face<br />
major challenges in terms of falling<br />
market shares under strong competition<br />
from private airlines and years of under<br />
investment in fleet strength and services.<br />
In fact, data indicates lower market<br />
shares for Indian Airlines compared to<br />
Jet in the three selected routes of study<br />
and also compared to Kingfisher in one<br />
route. In terms of slots also, in two of the<br />
selected routes, Indian Airlines has only<br />
one slot on one route and no slots at all<br />
in another.<br />
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The merger by itself will not ensure efficient<br />
functioning. It needs to be followed up by<br />
measures like overhaul of operations and<br />
a strong professional staff. The<br />
Government expects that the merger will<br />
save around Rs 5,000 crores annually.<br />
5. Conclusion<br />
The merger control as regards the<br />
Aviation sector is not just dependent<br />
upon the thresholds that are prescribed<br />
under Section 5 and 6 of the Competition<br />
Act. They are also significantly<br />
influenced by the Slot allocation system<br />
that is followed by different Airports,<br />
Aviation policy etc. Thus, the exact effect<br />
of a particular merger can be seen only<br />
on the comprehensive analysis of all the<br />
above factors.<br />
As on the data available on 2008, the<br />
implications of the mergers have been<br />
summarised as: 19<br />
(1) On the Delhi-Mumbai route<br />
relating to slot shares of airlines pre<br />
merger, it is seen that Jet had a share<br />
of 25 per cent, Indian Airlines had<br />
a share of 18 per cent and Kingfisher<br />
had a share of 10 per cent. The<br />
correlation between share of<br />
passengers and the share of slots<br />
is very high. Post merger, share of<br />
Jet has become 28.27 per cent, share<br />
of Kingfisher is 24.63 per cent and<br />
for Indian-Air India it is 20 per<br />
cent. Thus, the three combines now<br />
have around 73 per cent of the total<br />
slots in this market.<br />
(2) On the Delhi Chennai route, pre<br />
merger, in terms of slot shares, Jet<br />
had 22 per cent of the market;<br />
Indian had 17 per cent while<br />
Kingfisher had no share at all. Post<br />
merger, Jet has 32.6 per cent of the<br />
slots, Kingfisher which earlier did<br />
not have any slots has 13 per cent<br />
and Indian -Air India combine has<br />
26 per cent. Thus, the three<br />
combines together own around<br />
72 per cent of the slots.<br />
(3) In the Bangalore-Chennai route,<br />
pre-merger, Jet had 35 per cent of<br />
the shares, and Kingfisher had 17<br />
per cent. Post merger, Jet owns 33.3<br />
per cent of the slots, Kingfisher<br />
owns 55.5 per cent and Indian-Air<br />
India does not own any slot at all.<br />
Thus, Jet and Kingfisher together<br />
hold 70.9 per cent of the slots in the<br />
market.<br />
The following are evident from the above<br />
analysis:<br />
(a) Market share of Jet and Kingfisher<br />
have been strengthened<br />
considerably, post merger.<br />
(b) The national carrier is steadily<br />
losing its share to the above two<br />
private airlines.<br />
(4) Likelihood that the combination<br />
would result in the removal of a<br />
vigorous and effective competitor<br />
or competitors in the market.<br />
Jet and Air Sahara were both full<br />
cost carriers and were indeed<br />
vigorous competitors. In the Delhi -<br />
Mumbai sector, while Jet had<br />
27 per cent, Air Sahara had 9.5 per<br />
cent of market share (passengerwise)<br />
pre merger. In terms of slots,<br />
Jet had 25 per cent and Air Sahara<br />
10 per cent of the slots. Post merger,<br />
Jet now owns 28 per cent of the slots,<br />
including those of Jetlite (earlier Air<br />
Sahara). Similarly, in the Delhi-<br />
Chennai sector, pre merger, Jet had<br />
a market share of 29.2 per cent while<br />
Air Sahara had a market share of<br />
8.9 per cent. In terms of slots, Jet had<br />
22 per cent and Sahara 22 per cent<br />
19 Competition Issues in the Air Transport Sector in India, can be accessed at, http://<br />
www.cci.gov.in/images/media/completed/transport_20090421133744.pdf at p.38<br />
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of the slots. Post merger, Jet now<br />
owns 32.6 of all the slots (including<br />
Jetlite). This clearly establishes the<br />
removal of a vigorous competitor<br />
from the market.<br />
(5) Also, due to vigorous price<br />
competition, rising price of fuel and<br />
other issues, most of the airlines have<br />
been making major losses. Hence, the<br />
possibility of a failing business looms<br />
very large in this sector.<br />
(6) Relative advantage by way of<br />
contribution to the economic<br />
development, by any combination<br />
having or likely to have appreciable<br />
adverse effects on competition.<br />
Mergers will lead to scale<br />
economies, higher efficiency and<br />
improvement of productivity levels<br />
in the industry. Passengers will<br />
benefit from the fact that flight<br />
timings are likely to be rationalised<br />
and quality of service may improve<br />
with failing companies being<br />
acquired by the better performing<br />
companies. Overall, there is likely<br />
to be better utilisation of resources<br />
in the economy.<br />
(7) Whether the benefits of the<br />
combination outweigh the adverse<br />
impact of the combination, if any<br />
Considering the Indian Airlines -Air<br />
India merger, for many years Indian<br />
Airlines has been experiencing<br />
falling market shares under<br />
competition from the private airlines.<br />
There have also been years of under<br />
investment in the fleet. As a result,<br />
the airline has been experiencing<br />
losses and inefficiencies. While the<br />
merger by itself will not assure<br />
increase in efficiency, the resultant<br />
scale economies are expected to lead<br />
to better performance and the better<br />
utilisation of investment by the<br />
government.<br />
(8) Analysing the sector in terms of<br />
Section 20(4) of the Act, factors that<br />
may be noted are:<br />
(a)<br />
(b)<br />
(c)<br />
(d)<br />
(e)<br />
(f)<br />
Post mergers, there is a definite<br />
trend towards increased<br />
market concentration. This is<br />
indicated by the<br />
Concentration index in the<br />
selected sectors and also by<br />
the analysis of share of total<br />
passenger traffic as well as<br />
share of slot of the airlines.<br />
The market is oligopolistic.<br />
While there are a large<br />
number of players on the<br />
market, three players, namely<br />
Jet, Kingfisher and Indian<br />
Airlines control a major share<br />
of the market. Post merger, in<br />
terms of ownership of slots,<br />
market shares particularly in<br />
terms of share of slots of the<br />
two private players have<br />
increased substantially.<br />
There is some evidence of<br />
price parallelism between Jet<br />
and Kingfisher especially<br />
when the flights are<br />
scheduled closer together.<br />
We cannot however call it<br />
price collusion at this stage.<br />
Share of Indian in terms of<br />
ownership of slots and share<br />
of total passenger traffic is<br />
coming down compared to Jet<br />
and Kingfisher. It is thus,<br />
losing market share in terms<br />
of the above indicators to the<br />
private players.<br />
Mergers show indication of<br />
removal of a vigorous<br />
competitor from the market,<br />
e.g. in the case of Jet and<br />
Sahara on Delhi-Mumbai<br />
and Delhi-Chennai routes.<br />
Possibility of a failing business<br />
looms large in this sector due<br />
to rising fuel prices and intense<br />
price competition. However,<br />
mergers have benefits in terms<br />
of increased efficiency,<br />
economies of scale etc.<br />
158<br />
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Bibliography<br />
(1) Vinod Dhall, Key Concepts in Competition Law, in COMPETITION LAW TODAY:<br />
CONCEPTS, ISSUES AND THE LAW IN PRACTICE, 3 (Vinod Dhall, ed. 2007<br />
(2) T. Ramappa, COMPETITION LAW IN INDIA: ISSUES, POLICIES AND<br />
DEVELOPMENT, 187 (1 st ed. 2006)<br />
(3) http://www.competition-commission-india.nic.in/regulations/<br />
ConsolidatedCCI CombinationRegulation per cent20200_Revised30062008<br />
.pdf<br />
(4) Nancy Shah, Competition Issues in the Civil Aviation Sector Evaluating<br />
Competition related issues pertaining to the Indian Airlines’ Industry, with<br />
Special Reference to M&A in light of Competition Act, 2002 www.cci.gov.in/<br />
images/.../F1_NancyShah_20080411102237.pdf<br />
(5) Competition Issues in the Air Transport Sector in India, can be accessed at<br />
http://www.cci.gov.in/images/media/completed/transport_200904211<br />
33744.pdf<br />
(6) www.marketresearch.com/map/prod/1482657.html<br />
(7) Sunil Barthwal, Airline mergers and competition, The Financial Express, March<br />
30, 2007.<br />
(8) OECD Report on AIRLINE MERGERS AND ALLIANCES, Directorate for<br />
Financial, Fiscal And Enterprise Affairs Committee on Competition Law and<br />
Policy, DAFFE/CLP(2000)1, at 26, http://www.oecd.org/daf/clp<br />
(9) Berry, Steven, Carnall, Michael and Spiller, Pablo, “Airline Hubs: Costs,<br />
Markups 5 and the Implications of Customer Heterogeneity,” NBER Working<br />
Paper 5561, May 1996<br />
(10) Competition Issues in the Air Transport Sector in India, can be accessed at,<br />
http://www.cci.gov.in/images/media/completed/transport_2009042<br />
1133744.pdf at p.30<br />
(11) http://www.businessenvironment.org/dyn/be/docs/154/Nellist-Annex.pdf<br />
(12) http://www.cci.gov.in/images/workshop/14_15march07/14jhon.pdf?<br />
phpMyAdmin=NMPFRahGKYeum5F74Ppstn7Rf00<br />
(13) http://www.justice.gov/atr/public/testimony/hhi.htm<br />
Copyright © Chandrashekhar A.C. and Sumangala A.C.<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)<br />
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An Appraisal of India’s New Merger Control Regime<br />
Anamika Ahir*<br />
The new merger regime enforced on 1 st June, 2011 by Ministry of Corporate Affairs<br />
is a comprehensive set of regulations. The article attempts to critically examine the<br />
regulations along with its practical implications on the Indian markets.<br />
Introduction<br />
Lately, the Ministry of Corporate Affairs<br />
(MCA), Government of India had notified<br />
on 4 th March 2011, the provisions relating<br />
to regulation of “combination” also<br />
known as the “merger review provisions”<br />
under the Competition Act, 2002. This<br />
notification followed the release of new<br />
draft merger regulations by the<br />
Competition Commission of India (CCI).<br />
The Competition Act, 2002 was partly<br />
enforced on 20 th May, 2009 whereby, the<br />
merger control provisions were not<br />
notified. The Ministry of Corporate<br />
Affairs, Government of India has now<br />
notified that Sections 5, 6, 20, 29, 30 and<br />
31, regarding the merger control will be<br />
enforced on 1 st June, 2011. After this all<br />
mergers or acquisitions within the given<br />
thresholds in Section 5 of the Competition<br />
Act, 2002 will call for a prior approval<br />
from the Competition Commission of<br />
India. For this purpose, the notification<br />
to CCI must be done within 30 days of<br />
approval of the impugned merger by the<br />
board of directors of the merger parties<br />
or the execution of any agreement or any<br />
other document for the acquisition.<br />
These notifications and draft regulations<br />
will definitely alter substantially, the<br />
procedure for acquisition of shares or<br />
voting rights of listed companies in India<br />
from June 2011.<br />
The Competition Act controls all the<br />
“combinations” which reach the given<br />
thresholds for Indian or worldwide<br />
assets or turnover of the target company<br />
and the Indian or worldwide assets or<br />
turnover of the acquirers or the group to<br />
which the target will go post acquisition.<br />
However, it is pertinent to note that the<br />
size of the impugned transaction is not<br />
considered while deciding whether or<br />
not an acquisition is to be notified as a<br />
combination.<br />
Meaning of combination<br />
As per Section 5 of The Competition Act,<br />
2002, a “Combination” comprises of any<br />
of the following:<br />
(1) Any acquisition of control or<br />
shares or voting rights or assets of<br />
enterprises<br />
(2) Acquiring of control by person over<br />
an enterprises, where such person<br />
already has direct or indirect<br />
* Student, 3 rd year, National Law Institute University, Bhopal. E-mail: anamika.law@gmail.com<br />
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control over another enterprise<br />
engaged in similar or competitive<br />
business<br />
(3) Any merger or amalgamation<br />
between enterprises.<br />
For dealing with the various facets of<br />
merger control four notifications have<br />
been issued in four different parts. In a<br />
nutshell, the characteristics of the<br />
notifications are as follows:<br />
(A) Effective Date of Notification -<br />
1 st June, 2011 is declared as the date<br />
on which Sections 5, 6, 20, 29, 30<br />
and 31 of the Competition Act, 2002<br />
will be enforced.<br />
(B) Monetary Threshold Requirements<br />
- The value of assets 1 and turnover<br />
has been enhanced by 50 per cent<br />
on the basis of the wholesale price<br />
index for the purposes of Section 5<br />
of the Competition Act, 2002.<br />
A merger have to be notified if any<br />
of the below mentioned thresholds<br />
are met:<br />
(a) Combined assets of the<br />
acquirer and target in India<br />
is at least Rs. 1,500 crores or<br />
combined worldwide assets<br />
are of a minimum value of<br />
USD 750 million consisting at<br />
least Rs. 750 crores of Indian<br />
assets.<br />
(b) The combined turnover of the<br />
Indian entities is at least<br />
Rs. 4,500 crores or combined<br />
worldwide turnover is at least<br />
USD 2,250 million which<br />
includes at least<br />
Rs. 2,250 crores of turnovers<br />
in India.<br />
(c) The value of assets in India<br />
that belongs to corporate<br />
group which the target would<br />
go is at least Rs. 6,000 crores<br />
or the value of the worldwide<br />
assets owned by the group is<br />
at least USD 3 billion<br />
consisting at least<br />
Rs. 750 crores of assets in<br />
India.<br />
(d) The turnover in India of the<br />
group which the target would<br />
go to is at least Rs. 18,000 crores<br />
or the worldwide turnover of<br />
the group is at least<br />
USD 9 billion with at least<br />
Rs. 2,250 crores of turnovers in<br />
India.<br />
The CCI will have a period of<br />
180 days (earlier 210 days) from the<br />
date of notification within which it<br />
must consider the merger and<br />
decide whether to prohibit the<br />
merger or ask for modifications in<br />
order to clear the merger. This<br />
period can be further extended for<br />
6o days but not beyond.<br />
(C) Target entity - Some mergers and<br />
acquisitions will be exempted from<br />
India’s new merger control regime.<br />
These include:<br />
(a) Exemption of mergers and<br />
acquisitions for a period of<br />
five years, where the acquired<br />
target has assets of value not<br />
more than INR 250 crores or<br />
turnover of not more than<br />
INR 750 crores.<br />
(b) Also Share subscriptions,<br />
financing facilities or any<br />
acquisition by a public<br />
financial institution, bank or<br />
venture capital fund, foreign<br />
institutional investor, or Bank<br />
pursuant to any covenant of<br />
a loan agreement or<br />
investment agreement is<br />
exempted from notifying to<br />
CCI for approval.<br />
1 Assets - book value as per audited accounts and includes intangibles.<br />
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However, the public financial<br />
institution, foreign institutional<br />
investor, bank or venture capital<br />
fund must file a form with the CCI<br />
within seven days of the acquisition<br />
enclosing the details of the<br />
acquisition.<br />
(D) Group - A Group is defined in<br />
Explanation (b) of Section 5. Group<br />
means two or more enterprises,<br />
which directly or indirectly:<br />
(a) Exercise 26 per cent or more<br />
voting rights in other<br />
enterprise.<br />
(b) Appoint more than 50 per cent<br />
of board members in other<br />
enterprise.<br />
(c) Control 2 the management or<br />
affairs of the other enterprise.<br />
Under the new merger regime a<br />
“group” exercising less than<br />
50 per cent of voting rights in the<br />
other enterprise is exempted for a<br />
period of five years.<br />
Market Risks<br />
Effecting a merger or acquisition that<br />
reaches the prohibited threshold is<br />
outlawed in case such a merger or<br />
acquisition causes or is expected to cause<br />
a considerable adverse effect on<br />
competition within an Indian market.<br />
The Competition Act stipulates a number<br />
of aspects that the CCI must pay due<br />
regard while determining any<br />
considerable adverse effect on<br />
competition in an Indian market, due to<br />
a merger or acquisition. These aspects<br />
include factors likely to effect on share<br />
market, height of entry barriers, existence<br />
of countervailing power, scope of vertical<br />
integration and whether the target or<br />
acquirer is an unsuccessful business and<br />
whether the target is a nonconformist<br />
competitor. It is also required for CCI to<br />
consider whether the merger or<br />
acquisition is worthy of bearing any<br />
positive fruits. A proscribed merger or<br />
acquisition will be void.<br />
The decisive powers of CCI<br />
At the conclusion of its analysis, the CCI<br />
can under Section 31 of the Act:<br />
(a) make an order approving the<br />
merger or acquisition; or<br />
(b) make an order or direction that the<br />
merger or acquisition must not take<br />
effect; or<br />
(c) propose some modification to the<br />
merger or acquisition, where the<br />
CCI is of the opinion that the<br />
appreciable adverse effect on<br />
competition of the transaction<br />
could be eliminated by such<br />
modification.<br />
Any person or authority having a<br />
grievance against the direction or<br />
decision of CCI, may appeal to the<br />
Competition Appellate Tribunal.<br />
Procedure under the draft regulations<br />
The draft merger regulations notified by<br />
the CCI prescribe the form for the<br />
notification of combinations. The<br />
regulations stipulates filing of a shorter<br />
form for some combinations which<br />
includes acquisitions, of 15 per cent or<br />
less shares or voting rights for investment<br />
purpose or in the usual course of business<br />
not resulting in control of the target,<br />
acquisitions within a group, and<br />
acquisitions of shares or voting rights by<br />
an individual acting in a capacity of<br />
securities underwriter or pursuant to a<br />
bonus issue of shares or their<br />
sub-division. The regulations also<br />
provide elaborate scheme of filing fees<br />
for different combinations.<br />
2 Control includes controlling the affairs or management, either singly or jointly:<br />
• by one or more enterprises over another enterprise or group; or<br />
• by one or more groups over another group or enterprise.<br />
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Competition Commission of India at<br />
loggerheads with SEBI<br />
Under the current SEBI Takeover<br />
Regulations if an acquirer intends to<br />
acquire more than 15 per cent shares in a<br />
listed company, he will be required to<br />
publicly announce an open offer to the<br />
shareholders of the target company<br />
before the expiry of four working days of<br />
assenting to acquire the said shares. But<br />
in case such an acquisition suffices the<br />
requirements of a combination under the<br />
Competition Act, the acquirer will be<br />
bound to make an open offer according<br />
to the SEBI Takeover Regulations along<br />
with the notification to the Competition<br />
Commission as per the new merger<br />
control regime.<br />
The SEBI Takeover Regulations include<br />
a time-bound process wherein the offer<br />
opens before the expiry of 55 days from<br />
the day of public announcement and<br />
payments are made to the tendering<br />
shareholders within 15 days from the<br />
close of the offer. But if the acquisition<br />
requires to be notified to the Competition<br />
Commission of India, the shares tendered<br />
in the open offer cannot be transferred to<br />
the acquirer until approved by the<br />
commission or expiry of 180 days from<br />
the date of filing.<br />
It is pertinent to note that the registrar to<br />
the offer holds all the Shares tendered in<br />
an open offer in a trust until all the offer<br />
formalities are concluded. Consequently,<br />
any delay in receipt of approvals from<br />
CCI will create unnecessary<br />
inconvenience for the shareholders and<br />
also for acquirers who deposit a fraction<br />
of the offer consideration in escrow<br />
accounts which do not bear any interest<br />
with them. Hence, in my opinion it is vital<br />
to modify the offer timetable suitably in<br />
case the acquisition has to be notified<br />
under the Competition Act.<br />
There seems to be a further divergence in<br />
the operative provisions the Competition<br />
Act and the SEBI Takeover Regulations.<br />
The Competition Act stipulates that<br />
anyone who proposes to enter in a<br />
combination shall give notice to the<br />
commission in the prescribed form within<br />
30 days of carrying out of any<br />
“agreement” or “other document” for<br />
acquisition. 3<br />
The term “other documents” is defined<br />
in the draft regulations as “any document<br />
purporting to convey the intention to<br />
acquire control, shares, voting rights or<br />
assets”. 4 Moreover, the draft regulations<br />
specifies that the date on which intention<br />
to acquire is communicated to the Central<br />
Government, or a state government, or a<br />
statutory authority shall be deemed to be<br />
the date of execution of the other<br />
document for acquisition. 5 The words<br />
and the intention behind inclusion of<br />
these provisions are not clear both in its<br />
objective and application.<br />
Conclusion<br />
The Government in addition to the new<br />
merger regime is suggesting that a failure<br />
to notify under the rules may result in<br />
penalty imposition of up to 1 per cent of<br />
the total turnover or assets of the merger<br />
or acquisition by CCI. Though, the<br />
provision in the Competition Act<br />
empowering the CCI to impose such a<br />
penalty is not proposed to take effect at<br />
this point on 1 June 2011. Hence, for now<br />
after 1 st June, 2011, a failure to notify will<br />
merely result in violation of the<br />
Competition Act and will not call for<br />
imposition of any fines.<br />
3 Regulation 6(3) of draft regulations by The Competition Commission of India.<br />
4 Regulation 4(7) of draft regulations by The Competition Commission of India.<br />
5 Regulation 4(8) of draft regulations by The Competition Commission of India.<br />
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The introduction of the new merger<br />
regime under the Competition Act, 2002<br />
is a much awaited milestone in the<br />
application of a competition law regime<br />
in India. From 1 st June, 2011, companies<br />
intending to undergo merger or<br />
acquisition activity where the target or<br />
the acquirer has Indian assets will have<br />
to determine whether notification to the<br />
CCI is requisite or not. In near future, the<br />
draft merger regulations will undergo<br />
constant criticism and commentary from<br />
various sectors of the business.<br />
On a plain comprehension of the<br />
Competition Act, it seems that open<br />
market purchase of even a single share<br />
of an entity which meets the prescribed<br />
thresholds will prompt a requirement for<br />
notification. This undoubtedly cannot be<br />
the objective of the legislature. It is<br />
important that the CCI clarify such<br />
irregularity before implementing the<br />
regulations in the month of June.<br />
In the view that the SEBI Takeover<br />
Regulations are also proposed to<br />
undergo a considerable change, it is<br />
difficult to predict how acquisition of<br />
listed entities that may meet the<br />
requirements of a combination will be<br />
undertaken under the changed legal<br />
positions.<br />
It is also interesting to note that the<br />
notifications issued by MCA are<br />
unsigned and undated 6 . Hence, there<br />
prevails a reasonable confusion about the<br />
exact legal status of the notification.<br />
Copyright © Anamika Ahir<br />
6 http://www.mca.gov.in/Ministry/notifications.html<br />
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B-241<br />
Treading the Thin Wedge between “Unfair Trade<br />
Practices” and “Abuse of Dominant position”<br />
Kaushal Kumar Sharma*<br />
On 12 th August, 2011, the Competition Commission of India (CCI), by an order<br />
under Section 27 of the Competition Act, 2002 (the Act), held the DLF Ltd<br />
guilty of abuse of dominant position under the Act and imposed a penalty of<br />
Rs. 6,300 million. After holding the concerned enterprise guilty of abusing its<br />
dominant position, the CCI had the option of levying a penalty of up to 10 per cent<br />
of its average turnover for last three years. The CCI has charged penalty at<br />
7 per cent stating that in view of the nature of violations, the penalty should be<br />
harsh. Thus, in the opinion of CCI, the case called for some type of exemplary<br />
penalty.<br />
This article analyses the order of CCI. This includes the entire background in<br />
which the order was passed, the improving track record of CCI, the signal the<br />
order sends, the questions and hopes this order raises.<br />
Last few months have seen the<br />
Competition Commission of India (CCI)<br />
pass some affirmative orders after more<br />
than two years of its due constitution on<br />
1 st March, 2009 under Section 8 of the<br />
Competition Act, 2002 (the Act). This is<br />
good news. Any new law cannot evolve<br />
unless practiced. The competition law is<br />
no exception. Who is better placed to set<br />
the ball rolling than the CCI?<br />
The affected parties have the option to<br />
either agree or disagree with the views of<br />
the CCI as expressed in the decisions<br />
passed under Sections 27, 31 or 33 of the<br />
Act. If they agree, it is fine and the position<br />
of law has been laid down for the moment.<br />
If they do not agree, they have the option<br />
of going before the Competition Appellate<br />
Tribunal (COMPAT) under Section 53B<br />
of the Act. After COMPAT has applied<br />
mind and given its finding, the party<br />
disagreed with—either the CCI or the<br />
enterprise(s) involved—may go to<br />
Supreme Court under Section 53T of the<br />
Act, if it so desires. The decision of the<br />
Supreme Court, if the matter reaches there<br />
or, in case it stops either at the level, of the<br />
CCI or the COMPAT is the finally settled<br />
position of law at that particular point of<br />
time.<br />
* Commissioner of Income Tax, Ministry of Finance, Government of India, and former Director<br />
General & Head of Merger Control, Competition Commission of India. The views expressed<br />
are personal.<br />
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In this evolutionary process of<br />
competition law, the CCI has an extremely<br />
important role, that of the initiator of the<br />
process of evolution of competition law<br />
to play. Any hesitation for whatever<br />
reasons to reach appropriate decisions or<br />
delay in pronouncing decisions for any<br />
reasons, whatsoever are going to slow<br />
down this evolutionary process. It is said<br />
that the “perfect” is the enemy of “good”.<br />
It is better to start than to keep on fearing<br />
a bad start in the form of a bad order–just<br />
because of the fact that it has to wade<br />
through the appellate machinery. It is<br />
especially important in view of the fact<br />
that out of more than 90 orders passed by<br />
the CCI, the affirmative orders can be<br />
counted on your finger despite India – like<br />
any other economy in transition– being<br />
perceived a land full of anti-competitive<br />
practices.<br />
Therefore, it is heartening to note that the<br />
CCI has actually kick-started the process<br />
by passing a number of affirmative<br />
decisions in the recent past. This sends a<br />
strong message that the provisions of the<br />
Act are here to be enforced and the market<br />
participants better be aware that the<br />
referee is watching them play. So long as<br />
the game is fair, they need fear nobody.<br />
Commit a foul and be ready for a whistle<br />
and consequent action. In any case, no<br />
decision of the Commission is final<br />
unless duly confirmed in the appellate<br />
structure - first by the COMPAT and then<br />
by Supreme Court - envisaged under<br />
the Act.<br />
No doubt, it is a fact that the competition<br />
law is new to our country and the<br />
capacity to understand and apply the<br />
law would take sometime to develop.<br />
However, the Courts have shown enough<br />
mature understanding of the underlying<br />
philosophy behind the competition law.<br />
The decision of Hon’ble Supreme Court<br />
in the case of Competition Commission of<br />
India v. Steel Authority of India Limited &<br />
Another is a case in point which more<br />
than adequately amplifies that the higher<br />
judiciary is quite appreciative of the basic<br />
principles behind enactment of the<br />
competition law in the country and the<br />
objectives of this law.<br />
In the orders passed recently, the CCI has<br />
held the film producers/distributers<br />
guilty of anti-competitive conduct and<br />
levied a penalty of Rs. 1,00,000 each on<br />
various parties involved. There may be<br />
divergent views on the amount of<br />
penalty finally imposed and its<br />
justification after a long process of fact<br />
finding investigation by Director<br />
General, entire process of inquiry by the<br />
CCI, involving hearing a large number<br />
of parties over a long period of time,<br />
resources spent by CCI in defending<br />
different challenges in various courts<br />
involving a considerably long time and<br />
substantial resources. However, one<br />
thing stands out and that is that is that<br />
CCI is finally finding it feet and is in a<br />
position of announcing decisions<br />
without fear or favour. May be the CCI is<br />
maturing now.<br />
The other matter adjudicated by the CCI<br />
involves a case of predatory pricing — a<br />
tough issue generally speaking — even<br />
in the developed jurisdictions. The job of<br />
the CCI was made easier by the fact that<br />
the enterprise alleged to be indulging in<br />
predatory pricing was not charging a<br />
finite amount as predatory price but a<br />
zero price. This was an important factor<br />
helping the CCI reach finality relatively<br />
quickly. Compared to the case of film<br />
producers/distributers and multiplex<br />
association, the cases of DLF and MCX<br />
have relatively been decided in a little<br />
quicker manner. Hopefully, this<br />
indicates quickening of pace of decisions<br />
by CCI in future.<br />
On 12 th August, 2011, the CCI passed<br />
another landmark decision in Case No.<br />
19 of 2010, on the basis of information<br />
filed on 5 th May, 2010 by Belaire Owners<br />
Association against DLF and Ors. 1<br />
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Treading the Thin Wedge between “Unfair Trade Practices”<br />
and “Abuse of Dominant Position”<br />
Announcing a decision in nearly<br />
15 months time from the filing of<br />
information for a young competition<br />
agency is not bad. On the other hand, it<br />
would be stated to be rather prompt.<br />
The actual order of CCI, in case of Belaire<br />
Owners Association against DLF, after<br />
having enumerated the background,<br />
information and proceedings in the<br />
previous part, begins from Paragraph 12<br />
on Page 155 of the order. The issues<br />
crystallised by the Commission are<br />
summarised in Para 12.1 of the order.<br />
These are:<br />
(1) Do the provisions of Competition<br />
Act, 2002 apply to the facts and<br />
circumstances of the instant case?<br />
(2) What is the relevant market, in the<br />
context of Section 4 read with<br />
Section 2(r), Section 19(5),<br />
Section 19(6) and Section 19(7) of<br />
the Competition Act, 2002?<br />
(3) Is DLF Ltd. dominant in the above<br />
relevant market, in the context of<br />
Section 4 read with Section 19(4) of<br />
the Competition Act?<br />
(4) In case DLF Ltd. is found to be<br />
dominant, is there any abuse of its<br />
dominant position in the relevant<br />
market by the above party?<br />
The above would show that the issues<br />
have been correctly identified by CCI in<br />
its order. Perhaps there may not be any<br />
two views on the issue. It is the<br />
adjudication part where the CCI had to<br />
do a tight rope walk between the “unfair<br />
trade practices” and the provisions of<br />
the Act.<br />
The CCI has also passed a few orders in<br />
the past. There has to be a consistency of<br />
approach in the decisions. In an earlier<br />
case of charging of prepayment penalty<br />
by banks (Case No. 5 of 2009), the CCI<br />
has given considerable importance to the<br />
contract entered into between the lender<br />
and the borrower. What needs to be seen<br />
is that how the views of the CCI, as<br />
expressed in that order, reconcile with<br />
B-243<br />
the views expressed in this order.<br />
Further, while dealing with the<br />
prepayment charges in a fixed pattern<br />
printed agreement in which the consumer<br />
does not a choice, the CCI stated:<br />
…For the banking sector, prepayment<br />
charges are part of their overall<br />
strategy and asset liability<br />
management, while the consumer<br />
tends to look at them as barriers to ease<br />
of exit…<br />
(Paragraph 15.1 of order dated<br />
2 nd December, 2010<br />
in Case No. 5/2009)<br />
In this case, justification for not treating<br />
the prepayment penalty adversely<br />
affecting the competition was that the<br />
state of competition in banking sector<br />
was healthy – with so many players and<br />
the sector still registering growth:<br />
Though the prepayment penalty is<br />
being charged by the banks, it caused<br />
no negative impact in the growth of<br />
the home loan business &<br />
consequently on competition.<br />
(Paragraph 18 of the order dated<br />
2 nd December, 2010<br />
in Case No. 5/2009)<br />
It is not clear how a similar claim, if made<br />
by developers, that the terms in the<br />
agreement are a part of strategy as the<br />
development involves money which, at<br />
times, is borrowed at huge interests,<br />
therefore backing out by a person booking<br />
the apartment should involve a fear of<br />
forfeiture to ensure certainty for the<br />
project, can be countered. It may similarly<br />
be claimed that, but for small periodic<br />
fluctuations, the real estate sector is<br />
booming. Can it not be taken as a defence<br />
for no adverse impact on competition of<br />
all the actions the enterprise is being<br />
accused of?<br />
Another, nearly similar, Case No. 15/2011<br />
of Balabhadra Residency Flat Owners<br />
Association, Hyderabad, was closed vide<br />
order dated 5 th July, 2011, as not<br />
adversely affecting competition.<br />
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For legal certainty, it may be advisable<br />
for similar arguments leading to similar<br />
results.<br />
The last part of the order of CCI in DLF<br />
case deals with the practices prevalent<br />
in the trade of real estate development. If<br />
these are indeed industry practices-these<br />
should actually be being part of the order<br />
itself – it may give another defence to the<br />
enterprise in appellate proceedings. If all<br />
the competitors are following certain<br />
common practices for whatever reasons,<br />
how the dominant player can be held<br />
guilty of abuse of dominant position? In<br />
a scenario where a consumer willingly<br />
chooses one of the available options -<br />
under whichever circumstances<br />
including that of helplessness as all the<br />
participants are following the same trend<br />
- in the market, can it be said that the<br />
dominant player is abusing its position?<br />
Is the consumer a victim in this case of<br />
the prevalent “practices in the trade” or<br />
“abuse of dominant position” of any<br />
particular market participant who<br />
happens to come under the gaze of CCI<br />
either through some information or on<br />
its own motion? If that be the case, every<br />
dominant player would be at the mercy<br />
of the CCI. The only thing CCI has to do<br />
is to just look at the sectors having some<br />
“unfair trade practices,” locate the<br />
dominant player and fasten the liability<br />
of abuse of dominant position on its<br />
shoulders. It has nowhere to go. Is the<br />
dominant player also having the<br />
automatic responsibility of reforming the<br />
sector? Is it the intent of the Act? That,<br />
perhaps, was never the philosophy of the<br />
Act. A look at the media reporting the<br />
order indicates the flavour. Most of the<br />
reporting in media was on the lines “CCI<br />
fines DLF Rs. 630 crore for unfair trade<br />
practices” little realising that unlike<br />
many other countries, Indian competition<br />
law does not give the authority to CCI to<br />
look into “unfair trade practices”<br />
whereas, the same used to be available<br />
under MRTP Act, 1969 before it was<br />
repealed.<br />
Too much has been made out of the<br />
practice of giving readymade agreement<br />
to the customer who does not have any<br />
choice. The same issue came up before<br />
the Commission in bank prepayment<br />
penalty case referred to earlier wherein,<br />
by a majority order, the CCI found<br />
nothing wrong with the practice. On the<br />
contrary, it is held in the case of DLF that<br />
the agreements are one sided and this<br />
practice, like others, has also been<br />
emulated by weak competitors. It has not<br />
been brought on record, if DLF was the<br />
first to start the practice. This appears to<br />
be an interesting argument. Para 12.103<br />
of the order in DLF case states:<br />
In a competitive scenario, where the<br />
enterprise indulges in such anticonsumer<br />
conduct, there is sufficient<br />
competition in the market to provide<br />
easy alternatives for the consumers.<br />
It is not clear if the state of competition in<br />
real estate sector is so bad that a buyer of<br />
a premium residential unit in Gurgaon<br />
has no option except to agree to the anticonsumer<br />
conduct of getting to sign a<br />
printed contract of DLF? May be<br />
elsewhere he may have a choice?<br />
However, we are told that it is a nearly<br />
all India practice. It is not known if the<br />
developers claim it to be a mechanism to<br />
reduce administrative expenses.<br />
“Dominance,” by itself is not bad its<br />
abuse is, is the philosophy of the<br />
competition law which, we are told, is a<br />
modern instrument. Do we expect a<br />
dominant player - or a player which may<br />
be one of the few prominent players and<br />
with suitably picking of data or defining<br />
the relevant market in a particular<br />
manner - can be held to be a dominant<br />
player - to be a reformist to purge the<br />
trade of all unfair practices lest it should<br />
be accused of abuse of dominant<br />
position? If certain practices are<br />
prevalent in a trade, should the<br />
dominant player follow them to be one<br />
amongst the competitors, or to meet the<br />
competition, or it is supposed to be<br />
168<br />
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Treading the Thin Wedge between “Unfair Trade Practices”<br />
and “Abuse of Dominant Position”<br />
oblivious to the practices and not follow<br />
them despite pressure of the competition?<br />
Do we expect the dominant player to<br />
forget the practices adopted by others,<br />
dissect these practices and follow only<br />
that portion of practices which may not<br />
be called unfair?<br />
This brings us to the basic paradox on<br />
the provisions relating to abuse of<br />
dominant position. It is often said against<br />
these provisions that despite the basic<br />
philosophy of the competition law being<br />
“to protect the competition and not the<br />
competitor”, how come a player who has<br />
become dominant in the competitive<br />
process is being sought to be punished<br />
for a conduct for which others may go<br />
scot free. Forcibly putting the yoke of<br />
being a reformist on the shoulders of a<br />
dominant player, will strengthen those<br />
who, because of the logic given here, find<br />
the provision of abuse of dominant<br />
position not in tune with the basic ethos<br />
of competition laws.<br />
In the United Brands 2 case, it was held<br />
that “Chiquita” brand of banana was a<br />
“must have” brand for any departmental<br />
store. Not having that brand would<br />
jeopardise the very existence of the<br />
department store. In the cases of abuse of<br />
dominant position, what needs to be<br />
seen is why the second party had to enter<br />
into an agreement in the first place. In<br />
United Brands case, it was said that the<br />
other party had no practical choice, if it<br />
had to survive in the market. Can the<br />
same be said of a luxury brand premium<br />
residential unit? Are there any<br />
compulsions of those looking for a<br />
premium residential property not to look<br />
for any other developer in Gurgaon. The<br />
places in close vicinity could offer a<br />
comparative choice such as Noida,<br />
Greater Noida or the entire NCR region<br />
as a whole.<br />
There are a good number of working<br />
couples – one of whom work in Noida<br />
B-245<br />
and the other in Gurgaon. These couples<br />
decide either Gurgaon or Noida as a place<br />
of residence and one of the two<br />
commutes to the place of work. Further<br />
with the spread of Delhi, by leaps and<br />
bounds, where two places within the<br />
territory of Delhi take more than one to<br />
two hours, it is really difficult to<br />
understand how the two places - Noida<br />
and Gurgaon- can not be part of the same<br />
market- especially for the upwardly<br />
mobile aspiring for a property of a value<br />
between 2 and 2.5 crores. These are the<br />
people who, more likely than not, may<br />
own comfortable motor vehicles with<br />
chauffeurs.<br />
This entire issue of geographical market<br />
has been dealt by the Commission in Para<br />
12.38 of the order. While declaring that<br />
the Gurgaon is known to possess certain<br />
unique geographical characteristics such<br />
as its proximity to Delhi, proximity to<br />
Airports and a distinct brand image as a<br />
destination for upwardly mobile families,<br />
the CCI, in its order has compared the<br />
places such as Surat in Gujrat but not<br />
other places in close vicinity possessing<br />
similar characteristics. Except the last<br />
factor, i.e. the alleged distinct brand<br />
image as a destination for upwardly<br />
mobile families, all other factors apply<br />
in equal measure to NOIDA/Greater<br />
NOIDA/Faridabad/Ghaziabad. The<br />
defence of the party alleged to be in a<br />
dominant position may be that the<br />
relevant geographic market has not been<br />
adequately dealt with. On the contrary,<br />
use of Surat in Gujrat as a comparison<br />
and not any place close by may be used<br />
as a tool by the enterprise held to be in a<br />
dominant position to allege bias in<br />
appellate proceedings with forceful<br />
effect. The reason for the last factor, i.e. a<br />
distinct brand image of Gurgaon is not<br />
spelt out in the order. Whether it was as<br />
a result of some survey got done by the<br />
CCI is not clear. At least the order is silent<br />
2 27/76 [1978] ECR 207<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)<br />
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[Vol. 2<br />
on it. If it is not supported by any basis<br />
whatsoever, we should remember that<br />
unless backed by hard facts and<br />
reasoning, no order can survive in appeal<br />
only on the basis of some subjective<br />
assertions not backed by hard evidence.<br />
Further, the treatment given by the<br />
Commission in the past to some similar<br />
cases from Gurgaon/Faridabad in<br />
information relating to other developers<br />
of repute, holding that the information<br />
were either of consumer nature or did<br />
not raise any competitive concerns will<br />
be hard put to justify - decisions being<br />
on its own website (Girish Batra v. BPTP<br />
Ltd and Others, Case No. 42/2010 and<br />
many others).<br />
At this point, it may be instructive to<br />
remember the judgment of European<br />
Court of Justice in the Continental Can<br />
case. In that case, the ECJ found fault with<br />
the definition of relevant market adopted<br />
by the European Commission in<br />
Continental Can 3 case.<br />
In the Continental Can case, the European<br />
Commission had held that the Continental<br />
Can and its subsidiary SLW had a<br />
dominant position in three different<br />
product markets - cans for meat, cans for<br />
fish and metal tops - without giving a<br />
satisfactory explanation of why these<br />
markets were separate from one another<br />
or from the market for “cans” and<br />
“containers” generally.<br />
Similarly, in the case of United Brands<br />
case, the ECJ stated that the<br />
opportunities for the competition under<br />
Article 82 must be considered. It stated:<br />
with reference to a clearly defined<br />
geographic area in which (the<br />
product) is marketed and where the<br />
conditions are sufficiently<br />
homogenous to the economic power<br />
of the undertaking concerned to be<br />
able to be evaluated…<br />
If the enterprise in question argues that<br />
the product is marketed all over the globe<br />
and a large chunk of buyers are<br />
Non-Resident Indians, it may altogether<br />
change the contour of the case.<br />
Now coming to the last part of the order<br />
contained in Paragraph 12.112 which<br />
lists the common practices followed by<br />
developers in this line of activity. The<br />
order states that a few of the practices<br />
which the DLF has been following and<br />
are also followed by other builders. This<br />
is a very interesting argument. If this is<br />
true, the DLF can jolly well argue that<br />
the CCI has essentially tried to punish it<br />
for Unfair Trade Practices over which it<br />
has no jurisdiction. It may be really<br />
relevant to recall that the MRTPC<br />
Act, 1969 was repealed with effect from<br />
1 st September, 2009. Section 66 of the Act<br />
deals with the work-in-progress before<br />
MRTPC under the MRTP Act as on the<br />
date when the MRTPAct was repealed.<br />
The entire work-in-progress has been<br />
distributed to various agencies including<br />
COMPAT, CCI, DG in the CCI or The<br />
National Commission constituted under<br />
the Consumer Protection Act, 1986, etc.<br />
The part relating to unfair trade practices<br />
which was till then being dealt under<br />
MRTP Act, 1969, has not yet found a<br />
father. Not that the Government is not<br />
aware of this missing link, it has been<br />
repeatedly discussed at various levels<br />
with an aim to find a solution. As on date,<br />
the issue remains unresolved.<br />
Consequently, unlike at the time before<br />
the MRTP Act was repealed, there are no<br />
legal recourses to the area known as<br />
“unfair trade practices” being dealt by<br />
MRTPC earlier. Unlike many other<br />
countries, the law as envisioned under<br />
the Act, in India, does not include unfair<br />
trade practices within its ambit. The word<br />
“unfair” used in Section 4(2)(a) is in a<br />
different context.<br />
3 JO [1972] L7/25, (1972) CMLR D11<br />
170<br />
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Treading the Thin Wedge between “Unfair Trade Practices”<br />
and “Abuse of Dominant Position”<br />
Therefore, listing all these practices as<br />
practices of the entire trade in the<br />
decision of the CCI gives another window<br />
for the enterprise in question for claiming<br />
it to be an “unfair trade practice” and<br />
claim defence. The very fact that,<br />
admittedly, there are no provisions to<br />
tackle the “unfair trade practices’” today<br />
after the repeal of the MRTP Act, 1969,<br />
may be an argument in its favour. If<br />
indeed all the alleged abuses in the<br />
information are a part of the practices<br />
prevalent in the trade, it is a moot point<br />
whether these practices, even if adversely<br />
affecting the competition, should have<br />
been dealt under Section 3 of the Act by<br />
CCI or it should have chosen to hold a<br />
dominant player for abusing its dominant<br />
opposition for using the very same<br />
practices and, later, extended the scope of<br />
inquiry into these practices followed by<br />
other developers? Presently, it appears<br />
that the CCI has chosen the later path.<br />
Perhaps, the Commission could have<br />
considered the possibility of covering the<br />
matter under Section 3 of the Act. It would<br />
have given more strength to the order- not<br />
only against DLF but also other<br />
developers. Appellate outcome may be<br />
different now that the CCI has held DLF<br />
as violating Section 4 of the Act before<br />
holding the practice as wrong for further<br />
inquiry in case of other developers.<br />
B-247<br />
Historically, in cases of abuse of<br />
dominant position, the dominant<br />
enterprises imposed terms in their<br />
agreements which were a little more<br />
oppressive than the industry practice.<br />
The other party entering into the contract<br />
had not much of a choice, for commercial<br />
reasons, except to accept the oppressive<br />
terms which would not had been possible<br />
but for the dominant position of the other<br />
enterprise. The last part of the order<br />
alludes to the fact that these practices are<br />
common amongst most of the developers.<br />
This observation, if true, is likely to<br />
weaken the case before the first Appellate<br />
Authority, i.e. COMPAT.<br />
Another important thing which attracts<br />
attention is the question whether the<br />
judgments delivered in the context of<br />
MRTPC Act, 1969, before it was repealed,<br />
are of as much relevance in the light of<br />
the prominence given to them in the<br />
decision of CCI.<br />
It can be certainly said that the<br />
Commission has made a good beginning<br />
to make its presence felt. However, it<br />
remains to be seen whether the case<br />
survives or is upturned at COMPAT if it<br />
smells more of unfair trade practices or<br />
consumer nature in the case.<br />
Copyright © Kaushal Kumar Sharma<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)<br />
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[Vol. 2<br />
172<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)
2011] Notes on International Cases<br />
C-9<br />
Section C<br />
Notes on<br />
International Cases<br />
USA<br />
United States Court of<br />
Appeals, Fourth Circuit<br />
DuPont DE Nemours and Co. v.<br />
Colon Industries Incorporated<br />
Decided on 11th March, 2011<br />
Anti competitive practice — Motion to<br />
Dismiss Claim — DuPont brought trade<br />
secrets suit against Kolon — Kolon<br />
counterclaimed that DuPont had<br />
monopolised, attempted to monopolise<br />
the para-aramid market — District Court<br />
granted motion on basis that Kolon<br />
inadequately pled the relevant<br />
geographic market within which<br />
competition for para-aramid fibers takes<br />
place — Kolon failed to plead adequately<br />
unlawful exclusionary conduct on the<br />
part of DuPont — District Court held<br />
Supreme Court precedent required<br />
including in the relevant geographic<br />
market definition all locations where<br />
product suppliers are headquartered —<br />
relied on Tampa Electric Co. v. Nashville<br />
Coal Co. — District Court erred both in<br />
holding that Tampa Electric required the<br />
Netherlands and Korea to be included in<br />
Kolon’s relevant geographic market<br />
definition — Motion to dismiss order<br />
reversed.<br />
Under the Sherman Act, a Plaintiff<br />
making monopoly and attempted<br />
monopoly claims must allege a relevant<br />
geographic market to help the Court<br />
determine whether the defendant has<br />
monopoly power. In this case, the<br />
District Court held that Supreme Court<br />
precedent required including in the<br />
relevant geographic market definition all<br />
locations where product suppliers are<br />
headquartered. Yet the Supreme Court<br />
case upon which the District Court relied,<br />
Tampa Electric Co. v. Nashville Coal Co.,<br />
365 U.S. 320 (1961), requires no such<br />
thing. Rather, it requires that Courts<br />
consider, in defining the relevant<br />
geographic market, where sellers operate<br />
and where purchasers can predictably<br />
turn for supplies. If U.S. consumers can<br />
predictably turn to supplies only in the<br />
United States, then the United States is<br />
the relevant geographic market. Because<br />
that is what Kolon Industries<br />
Incorporated alleged here, the District<br />
COMPETITION LAW REPORTS (JUL-AUG 2011) 173
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Competition Law Reports [Vol. 2<br />
Court erred in dismissing its<br />
counterclaim for failure to sufficiently<br />
plead a relevant geographic market.<br />
DuPont attempted to wield, and did<br />
wield, monopoly power over the U.S.<br />
para-aramid fiber market in violation of<br />
Section 2 of the Sherman Act. Three paraaramid<br />
producers-sold their para-aramid<br />
fibers to U.S. Consumers. In February<br />
2009, DuPont brought a trade secrets suit<br />
against Kolon, a relative newcomer to<br />
para-aramid production. Kolon<br />
counterclaimed that DuPont had<br />
monopolized and had attempted to<br />
monopolize the para-aramid market in<br />
violation of Section 2 of the Sherman Act,<br />
15 U.S.C. § 2.1 The primary thrust of<br />
Kolon’s second amended counterclaim<br />
(Counter-claim) is that DuPont illegally<br />
used multi-year supply agreements with<br />
high-volume para-aramid fiber<br />
customers. Those agreements required<br />
high-volume customers to purchase 80<br />
to 100 per cent of their para-aramid<br />
requirements from DuPont. Kolon alleged<br />
that those agreements removed<br />
substantial commercial opportunities<br />
from competition and limited other paraaramid<br />
fiber producers’ ability to<br />
compete.<br />
DuPont moved, under Federal Civil<br />
Procedure Rule 12(b)(6), to dismiss<br />
Kolon’s Counter-claim. The District<br />
Court granted that motion on<br />
18 th December, 2009, on the bases that:<br />
(a) Kolon inadequately pled the<br />
relevant geographic market within<br />
which competition for para-aramid<br />
fibers takes place; and<br />
(b) Kolon failed to plead adequately<br />
unlawful exclusionary conduct on the<br />
part of DuPont. This Court reviews the<br />
grant de novo.<br />
When ruling on a Rule 12(b)(6) motion<br />
to dismiss, “a Judge must accept as true<br />
all of the factual allegations contained<br />
in the complaint.” Nevertheless, a<br />
complaint “need only give the defendant<br />
fair notice of what the claim is and the<br />
grounds upon which it rests.” Therefore,<br />
the Court drew all reasonable inferences<br />
in favor of the Plaintiff.<br />
Monopoly Claim — DuPont violated<br />
Section 2 of Sherman Act — Use of<br />
exclusive contracts with high-volume<br />
para-aramid customers — Whether<br />
District Court erred in holding that<br />
Kolon failed to adequately plead anticompetitive<br />
conduct — As Per Kolon<br />
determination rested on information<br />
inappropriately considered on a motion<br />
to dismiss and on inferences in DuPont’s<br />
favour — Kolon adequately pled all<br />
elements of monopolisation claim —<br />
Order reversed.<br />
It was contended that DuPont violated<br />
Section 2 of the Sherman Act through its<br />
use of exclusive contracts with highvolume<br />
para-aramid customers. Under<br />
Section 2, “every person who shall<br />
monopolize, or attempt to monopolize,<br />
or combine or conspire with any other<br />
person to monopolise any part of the<br />
trade” is guilty of an offense and subject<br />
to penalties. 15 U.S.C. § 2. To prove a<br />
Section 2 monopolization offense, a<br />
Plaintiff must establish two elements:<br />
(1) the possession of monopoly power;<br />
and<br />
(2) willful acquisition or maintenance<br />
of that power-as opposed to simply<br />
superior products or historic<br />
accidents.<br />
In analysing Sherman Act Section 2<br />
claims Courts begin with a preliminary<br />
inquiry into market definition, which<br />
serves as a tool to determine the<br />
defendant’s market power. Cases in<br />
which dismissal on the pleadings is<br />
appropriate frequently involve either - (1)<br />
failed attempts to limit a product market<br />
174<br />
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C-11<br />
to a single brand, franchise, institution,<br />
or comparable entity that competes with<br />
potential substitutes or (2) failure even<br />
to attempt a plausible explanation as to<br />
why a market should be limited in a<br />
particular way.<br />
In this case it was pled that the relevant<br />
geographic market was worldwide<br />
supply of para-aramid fiber to<br />
commercial purchasers in the United<br />
States. Kolon also pled that: the U.S. paraaramid<br />
market is distinct from other<br />
markets; prices are high while supply is<br />
low; some foreign manufacturers do not<br />
sell their para-aramid fibers to U.S.<br />
consumers; high technical and legal<br />
barriers to the U.S. paraaramid market<br />
exist; and DuPont dominates the market<br />
through the use of essentially exclusive<br />
multi-year contracts.<br />
The District Court nevertheless<br />
concluded that “the market must be<br />
expanded to include the areas where the<br />
sellers operate,” apparently without<br />
regard to whether U.S. consumers of<br />
para-aramid fibers can practicably turn<br />
to supplies in those places.<br />
Here, Kolon pled a relevant geographic<br />
market—the United States. Further, Kolon<br />
pled plausible reasons for limiting the<br />
geographic market to the United States.<br />
Kolon therefore cleared the hurdle of<br />
pleading a plausible relevant geographic<br />
market. Whether Kolon’s proffered<br />
relevant geographic market definition<br />
will hold up upon a fact—intensive<br />
inquiry remains to be seen. But<br />
dismissing Kolon’s Counter-claim on its<br />
face was error.<br />
The District Court also concluded that<br />
Kolon failed to adequately plead<br />
anticompetitive conduct. Kolon contends<br />
that this determination rested on<br />
information inappropriately considered<br />
on a motion to dismiss and on inferences<br />
in DuPont’s, instead of Kolon’s, favour.<br />
We agree.<br />
However, the District Court erred in<br />
accepting statements beyond the<br />
Counter-claim and making inferences on<br />
that basis in favor of DuPont. And<br />
because the record indicates that the<br />
parties had not yet had the opportunity<br />
to conduct reasonable discovery,<br />
converting the motion to dismiss to one<br />
for summary judgment, where such<br />
statements, if appropriately presented,<br />
could be considered, would have been<br />
error.<br />
In sum, the District Court erred both in<br />
holding that Tampa Electric required the<br />
Netherlands and Korea to be included in<br />
Kolon’s relevant geographic market<br />
definition and in considering facts<br />
beyond the pleadings and construing<br />
them against Kolon to dismiss Kolon’s<br />
Counter-claim. Because Kolon plausibly<br />
pled monopolisation and attempted<br />
monopolization in violation of Section 2<br />
of the Sherman Act, we reverse.<br />
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Competition Law Reports [Vol. 2<br />
176<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)
2011]<br />
News & Events D-31<br />
Section D<br />
News & Events*<br />
Australia<br />
Coles discounting of house<br />
brand milk is not predatory<br />
pricing<br />
T<br />
he<br />
Australian Competition and<br />
Consumer Commission (ACCC) has<br />
reached the finding that there is no<br />
evidence of Coles acting in breach of the<br />
Competition and Consumer Act, 2010<br />
(CCA). The major impact of the reduction<br />
in milk prices was since January which<br />
reduced the profit margins of the<br />
supermarkets’ on house brand milk.<br />
The ACCC to assess whether Coles is or<br />
has been in breach of the two predatory<br />
pricing provisions of the CCA conducted<br />
industry wide enquiries with dairy<br />
market participants including industry<br />
associations, milk processors,<br />
supermarkets and independent retailers.<br />
This exercise revealed that Coles’<br />
purpose in reducing the price of its house<br />
brand milk was to increase its market<br />
share by taking sales from its<br />
supermarket competitors including<br />
Woolworths. As to the relationship<br />
between dairy farmers and milk<br />
processors, it is the case that some<br />
processors pay some farmers a lower<br />
farm gate price for milk sold as<br />
supermarket house brand milk. However<br />
on the evidence it was gathered that over<br />
the last 6 months most milk processors<br />
have paid the same farm gate price to<br />
dairy farmers irrespective of whether it<br />
is intended to be sold as branded or<br />
house brand milk and hence no evidence<br />
was found against Coles. 1<br />
ACCC not to oppose proposed<br />
merger of Teys bros and<br />
Cargill beef Australia<br />
T<br />
he<br />
ACCC has not opposed the<br />
proposed merger of the meat<br />
processing operations of Teys Bros.<br />
(Holdings) Pty. Ltd. and Cargill Beef<br />
Australia. Cargill supplies to both the<br />
* Compiled and edited by G.R. Bhatia, Partner and Head, Competition Law Practice Group,<br />
Kanika Chaudhary and Nidhi Singh, Associates, Luthra & Luthra Law Offices, New Delhi<br />
© Copyright reserved<br />
1 http://www.accc.gov.au/content/index.phtml/itemId/998776/fromItemId/2332<br />
COMPETITION LAW REPORTS (JUL-AUG 2011)<br />
177
D-32 Competition Law Reports<br />
[Vol. 2<br />
domestic and export beef markets, with<br />
the abattoirs in Tamworth and Wagga<br />
and the feedlot at Stockinbingal whereas<br />
Teys operates four beef abattoirs at<br />
Biloela, Beenleigh and Rockhampton in<br />
Queensland and Naracoorte in South<br />
Australia. Teys also operates a feedlot<br />
near Condamine in southern<br />
Queensland.<br />
In reaching its view on the proposed<br />
merger, the ACCC conducted extensive<br />
consultation of interested parties<br />
including cattle producers, feedlot<br />
operators, saleyard operators and agents,<br />
industry associations, abattoir operators,<br />
supermarkets and other suppliers and<br />
buyers of meat products. In considering<br />
whether the merger would enable the<br />
merged firm to depress fat cattle prices<br />
in the locations where both Teys and<br />
Cargill currently compete, the ACCC was<br />
satisfied post its consultation and from<br />
its inquiries that several existing<br />
competitors in these locations would be<br />
capable of responding by attracting<br />
business and winning market share<br />
away from the merged entity. 2<br />
Canada<br />
Competition bureau seeks to<br />
block joint venture between<br />
Air Canada and United<br />
Continental<br />
T<br />
he<br />
Commissioner of Competition filed<br />
an application with the<br />
Competition Tribunal for prohibiting the<br />
proposed joint venture between Air<br />
Canada and United Continental<br />
Holdings Inc. The proposed joint venture<br />
would allow Air Canada and United<br />
Continental to operate and set prices as<br />
one airline which would allow<br />
consumers already facing high prices<br />
with lesser choices on high demand air<br />
passenger routes. The proposed joint<br />
venture is in effect a merger between Air<br />
Canada and United Continental on all<br />
of their Canadian and US operations. It<br />
would allow the parties to jointly set<br />
prices, capacity and schedules. If<br />
allowed to proceed, it will result in:<br />
• a monopoly on ten transborder<br />
routes;<br />
• substantially reduced competition<br />
on an additional nine transborder<br />
routes; and<br />
• significantly higher prices. 3<br />
Therefore, the Competition Bureau is of<br />
the view that if allowed, such a merger<br />
would adversely impact the market.<br />
Bell Canada to pay a penalty<br />
of $10 million for misleading<br />
advertisement<br />
B<br />
ell<br />
Canada agreed to stop making<br />
misleading representations about<br />
the prices offered for its services. Under<br />
the terms of a consent agreement filed<br />
with the Competition Tribunal, Bell is<br />
also required to pay an administrative<br />
monetary penalty of $10 million, the<br />
maximum amount allowed under the<br />
Competition Act. Bell has charged higher<br />
prices than advertised for many of its<br />
services, including home phone, Internet,<br />
satellite TV and wireless. The advertised<br />
prices were not in fact available, as<br />
additional mandatory fees, such as those<br />
related to Touch Tone, modem rental and<br />
digital television services, were hidden<br />
from consumers in fine-print disclaimers.<br />
Under the terms of a consent agreement<br />
filed with the Tribunal, Bell has agreed<br />
to:<br />
2 http://www.accc.gov.au/content/index.phtml/itemId/995810/fromItemId/2332<br />
3 http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03386.html<br />
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• modify all of its non-compliant<br />
advertisements within 60 days;<br />
and;<br />
• pay an administrative monetary<br />
penalty of $10 million. 4<br />
Les Entreprises Promécanic<br />
Ltée pleaded guilty and fined<br />
$425,000 for bid-rigging<br />
L<br />
es<br />
Entreprises Promécanic Ltée has<br />
pleaded guilty to three charges of<br />
bid-rigging and has also been fined<br />
$425,000 for its role in an agreement to<br />
rig bids for private sector ventilation<br />
contracts for residential high rise<br />
buildings in the Montreal area.<br />
Promécanic pleaded guilty in the Quebec<br />
Superior Court to three criminal charges<br />
of rigging bids on three calls for tenders<br />
issued by general contractors in 2004 and<br />
2005 to install ventilation systems.<br />
Promécanic admitted that it had secretly<br />
participated in the coordination of its<br />
bids with competitors to pre-determine<br />
the winners of the contracts. The illegal<br />
agreements also included compensation<br />
between the participants to ensure that<br />
the contract was awarded to the<br />
designated company. 5<br />
European Union<br />
Polish telecoms operator fined<br />
more than €124 million for<br />
abuse of dominance<br />
T<br />
he<br />
European Union (EU) fined the<br />
Polish telecoms operator<br />
Telekomunikacja Polska S.A. (TP) for<br />
abusing its dominant position in the<br />
Polish telecommunications market. In<br />
Poland, Internet operators who want to<br />
provide retail broadband Internet access<br />
to end-users will usually use TP’s access<br />
network, since building an alternative<br />
access network is not economically<br />
viable. Thus, the operators require certain<br />
wholesale broadband access products,<br />
which are provided exclusively by TP.<br />
The EU found that TP had obstructed the<br />
entry of new operators into Polish<br />
broadband markets by, inter alia,<br />
proposing unreasonable conditions,<br />
delaying negotiations, unjustifiably<br />
rejecting orders and refusing to provide<br />
accurate information to the potential<br />
operators. This impeded competition and<br />
amounted to an abuse of dominance by<br />
TP. The EU ordered TP to cease and desist<br />
its anti-competitive conduct, and<br />
imposed a fine of •124 million on TP. 6<br />
EU General court annuls fines<br />
imposed on Mitsubishi and<br />
Toshiba for gas insulated<br />
switchgear market<br />
T<br />
he<br />
EC imposed fines amounting to<br />
more than •750 million on<br />
European and Japanese companies,<br />
including Mitsubishi and Toshiba, for<br />
their participation in a cartel for gas<br />
insulated switchgear (an important<br />
component in electric substations). The<br />
EC found that the companies had entered<br />
into an unwritten understanding to<br />
develop a quota system and<br />
geographically divide markets. The<br />
General Court has upheld the finding<br />
that there was a cartel, but found that the<br />
EC had contravened the principle of<br />
equal treatment by using different<br />
4 http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03388.html<br />
5 http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03391.html<br />
6 http://www.lexology.com/library/detail.aspx?g=fc4cf720-a593-4df9-9dbd-<br />
0b268bcebd44<br />
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reference years for the turnovers of the<br />
European companies and Toshiba/<br />
Mitsubishi. As such, it annulled the fines<br />
for Toshiba and Mitsubishi. The General<br />
Court also reduced the fine imposed on<br />
Fuji Group from •2.4 to •2.2 million, to<br />
take into account the fact that they had<br />
cooperated in the investigations. 7<br />
South Africa<br />
Government departments<br />
appeal against the<br />
Competition Tribunal’s<br />
Decision to permit Wal-Mart<br />
T<br />
he<br />
Competition Tribunal approved<br />
Wal-Mart’s purchase of Massmart<br />
on the condition that no jobs are cut for<br />
two years, both companies ensure that<br />
existing labour agreements are honored<br />
for three years after the takeover, and that<br />
$14.6 million is invested in a fund to<br />
assist in developing local suppliers.<br />
According to the departments of<br />
Economic Development, Trade &<br />
Industry and Forestry & Fisheries the<br />
failure by the merger parties did not<br />
provide certain information and<br />
documents for discovery which<br />
prevented the government from<br />
investigating. Consequently, the lack of<br />
information in turn affected the ability of<br />
the Competition Tribunal to properly<br />
appreciate the potential damage of the<br />
merger and the crafting of appropriate<br />
conditions to address such damage. 8<br />
USA<br />
Denso bids for leniency over<br />
cartel violation in USA<br />
Automotive parts maker Denso Corp.<br />
has voluntarily reported its<br />
involvement in price-fixing to the US<br />
antitrust agency for seeking remission<br />
of a potentially huge fine. The first<br />
company to come forward before an<br />
investigation opens is fully exempted.<br />
Denso informed the Fair Trade<br />
Commission (FTC) about a cartel formed<br />
by auto parts makers and prompted<br />
other firms to follow suit, leading to FTC<br />
conducting searches of seven Japanese<br />
companies. Under the revised<br />
antimonopoly law, which took effect in<br />
2006, the FTC can exempt from or<br />
reduces fines for up to five companies<br />
for self-reporting an antitrust violation. 9<br />
FTC approves EA proposal to<br />
buy PopCap<br />
Videogame maker Electronic Arts (EA)<br />
has won U.S. antitrust approval to<br />
buy PopCap Games. The deal was<br />
estimated at up to $1.3 billion, to better<br />
compete with Zynga Inc, which is headed<br />
for an initial public offering. PopCap has<br />
such popular video games as “Bejeweled”<br />
and “Plants vs. Zombies.” EA is investing<br />
more in online content as customers buy<br />
fewer games on discs to play on consoles.<br />
Videogame companies now offer users<br />
7 http://europa.eu/rapid/pressReleasesAction.do?reference=CJE/11/70&format=<br />
HTML&aged=0&language=EN&guiLanguage=en<br />
8 http://www.golegal.co.za/content/government-departments-appeal-againstcompetition-tribunal%E2%80%99s-antitrust-commission-decision<br />
9 http://search.japantimes.co.jp/cgi-bin/nb20110722a2.html<br />
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options to play free or low-priced games<br />
on mobile devices, PCs and Facebook. 10<br />
Stanley gets us antitrust ok to<br />
buy Niscayah<br />
S<br />
tanley<br />
Black & Decker Inc. (Stanley)<br />
have got the nod of the antitrust<br />
regulator on the proposed acquisition of<br />
Sweden’s Niscayah Group AB. Stanley<br />
has bought the company for or<br />
18 Swedish Krona ($2.73) per share and<br />
.05 Swedish Krona (1 cent) per warrant.<br />
The offer represents a 15 per cent<br />
premium to Niscayah’s closing stock price<br />
the day before the offer was announced.<br />
Niscayah’s board has recommended that<br />
shareholders and warrant holders accept<br />
Stanley’s offer. Niscayah shareholders<br />
representing about 19.5 percent of the<br />
shares have committed to do so, subject to<br />
certain conditions. Niscayah’s 2011<br />
revenue is estimated at $1 billion, and<br />
Stanley has said the company could<br />
complement its own security product<br />
offerings. Niscayah’s business is in<br />
Europe and the Nordic region, as well as<br />
the United States. 11<br />
ASIA<br />
Singapore<br />
Alliance agreement notified to<br />
the Competition Commission of<br />
Singapore<br />
Singapore Airlines Limited (SIA) and<br />
Virgin Australia Airlines Pty. Ltd.<br />
(Virgin Australia) had applied to the<br />
Competition Commission of Singapore<br />
(CCS) for a decision to clear their<br />
Proposed Alliance (Alliance). Under the<br />
Alliance, SIA and Virgin Australia will<br />
code share international and domestic<br />
flights, also provide frequent-flyer<br />
programs, lounge benefits to each other’s<br />
customers, conduct joint sales, marketing<br />
and distribution and co-ordinate flight<br />
schedules between Singapore and<br />
Australia. SIA and Virgin Australia have<br />
stated that the Alliance does not breach<br />
the Competition Act as it will increase<br />
competition for air passenger services<br />
from Singapore and various Australian,<br />
Pacific and trans-Tasman destinations.<br />
The proposed alliance is intended to be<br />
implemented in 2011, and its purpose is<br />
to ensure mutual benefit to the parties<br />
involved, as well as to benefit<br />
passengers. It should be noted that an<br />
application for this Proposed Alliance<br />
Agreement has also been filed in<br />
Australia and is awaiting decision from<br />
both regulators. 12<br />
T<br />
he<br />
Japan<br />
Cease & Desist Order to<br />
DeNA<br />
Japan Fair Trade Commission<br />
(JFTC) has just issued a cease and<br />
desist order to Japanese mobile gaming<br />
giant DeNA after an investigation. The<br />
alleged offense is that DeNA pressurized<br />
social game developers to only release<br />
games on its platform exclusively. The<br />
order states that the company violated<br />
article 19 of the Anti-monopoly Act which<br />
simply dictates that ‘no entrepreneur<br />
10 http://www.reuters.com/article/2011/07/28/us-popcapgames-electronicarts-antitrustidUSTRE76R4PY20110728?feedType=RSS&feedName=internetNews<br />
11 http://www.msnbc.msn.com/id/43796965/ns/world_news-europe/t/stanley-gets-usantitrust-ok-buy-niscayah/<br />
12 http://app.ccs.gov.sg/Spore_airline_ltd_virgin_airline.aspx<br />
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shall employ unfair trade practices.’ It<br />
goes on to dictate that DeNA shall stop<br />
such actions, and never force social game<br />
developers not to provide the games<br />
through other mobile SNS, by<br />
disconnecting the website links of the<br />
games the developers provide through<br />
Mobage-Town if the developers have<br />
provided the games through other mobile<br />
SNS. DeNA’s official response to the<br />
C&D is interesting, saying that the<br />
allegation pertains to “a transaction with<br />
a certain social game application<br />
provider,” language which sounds like<br />
an isolated (alleged) incident. 13<br />
T<br />
he<br />
JFTC raids 7 auto parts<br />
makers over alleged pricefixing<br />
cartel<br />
JFTC raided seven Japanese auto<br />
parts makers on Wednesday,<br />
including Denso Corp. and Mitsubishi<br />
Electric Corp., over their alleged<br />
involvement in a price-fixing cartel. The<br />
JFTC suspects that the parts<br />
manufacturers had meetings from 2002<br />
or earlier to set parts prices and decided<br />
which companies would win contracts<br />
before bidding for orders from<br />
automakers. Other companies<br />
investigated by the commission are<br />
Hitachi Automotive Systems Ltd.,<br />
Calsonic Kansei Corp., Mitsuba Corp.,<br />
T.RAD Co. and Denso subsidiary Asmo<br />
Co. The parts makers allegedly formed a<br />
cartel to fix prices of windshield wipers,<br />
radiators, engine starters and alternators<br />
supplied to automakers. JFTC had raided<br />
the offices of Denso and Mitsubishi<br />
Electric. Over price-fixing cartel practices<br />
for auto parts, the Japanese watchdog<br />
and U.S. law enforcement authorities<br />
launched investigations in their<br />
respective countries in February last year,<br />
and three Japan-affiliated companies,<br />
including a U.S. subsidiary of Denso,<br />
were targeted by the Federal Bureau of<br />
Investigation. 14 India<br />
T<br />
op<br />
CCI Probes Carmakers on<br />
parts, servicing<br />
carmakers Fiat, Honda and<br />
Volkswagen are under investigation<br />
by the CCI for restricting the supply of<br />
spare parts and technical know-how for<br />
servicing cars in the open market. The<br />
DG is directed to carry out investigation<br />
in the said matter and the<br />
aforementioned companies have received<br />
notices in this regard. The said probe is<br />
the result of a consumer complaint on<br />
car companies and dealerships<br />
controlling the spare parts and servicing<br />
business through their dealerships. The<br />
information is filed in relation to car<br />
brands which have a limited distribution<br />
network and customers face<br />
inconvenience if their city does not have<br />
a workshop or dealership outlet. As a<br />
result, the consumer is held hostage to<br />
the OEM dealerships and by controlling<br />
the supply of spares and technical<br />
knowhow, car companies and their<br />
dealers also control the price of spares<br />
and services. 15<br />
13 http://www.penn-olson.com/2011/06/10/japan-dena-anti-competitive/<br />
14 http://mdn.mainichi.jp/mdnnews/business/archive/news/2011/07/20/20110720p2g<br />
00m0bu057000c.html<br />
15 http://articles.timesofindia.indiatimes.com/2011-05-25/india-business/<br />
29581486_1_spare-parts-cci-servicing<br />
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T<br />
he<br />
Apple India charged of<br />
anti-competitive practices<br />
CCI has started inquiring into<br />
allegation of abuse of dominant<br />
position by Apple India. In the information<br />
filed before the CCI, Apple has been<br />
accused of oppressing user choice, by<br />
offering iPhone 4 with only two service<br />
providers, namely Aircel and Airtel. The<br />
information also alleges that a user can<br />
only download the Apple software from<br />
the iStore (Apple Store) and application<br />
of other developers are not recognized by<br />
Apple products. Furthermore, the fact that<br />
smartphones from Apple can be serviced<br />
only in Apple centers enhances Apples’<br />
dominant position and leads to increased<br />
cost to the consumer. 16<br />
Regulatory reforms bill aims to<br />
settle SECTORAL clashes<br />
with the CCI<br />
T<br />
he<br />
Delhi High Court, through an<br />
interim order, has prevented the CCI<br />
from investigating alleged anti-competitive<br />
practices of the state-owned oil marketing<br />
companies in the supply of aviation fuel.<br />
The state-owned oil marketing companies<br />
had argued that the case falls under the<br />
ambit of the Petroleum and Natural Gas<br />
Regulatory Board, the sectoral regulator<br />
and not the CCI. The Planning<br />
Commission, keeping in mind such<br />
developments, including previous clashes<br />
between SEBI and RBI with the CCI, has<br />
decided to introduce a Regulatory Reform<br />
Bill with the aim of evolving a uniform<br />
approach to the regulatory architecture<br />
across all sectors of the economy. The bill<br />
further proposes to establish a uniform<br />
News & Events D-37<br />
process for the selection of chairman and<br />
members of the regulatory agency; their<br />
tenure; age limit; etc. Under the current<br />
scenario, each ministry has evolved its<br />
own approach to designing and manning<br />
the regulator, making it inconsistent with<br />
sound management science.<br />
CCI grants interim relief to<br />
Santuka Agencies<br />
In a drug cartel case, CCI has granted<br />
an interim relief to a drug stockist of<br />
Orissa, Santuka Agencies till<br />
30 th June, 2011. Santuka Agencies which<br />
stocks drugs manufactured by USV group<br />
in Orissa, petitioned the CCI for interim<br />
relief after the manufacturer issued a<br />
termination notice to it. Santuka Agencies<br />
has alleged that the action by USV group<br />
followed a dispute with All India<br />
Organisation of Chemists and Druggists<br />
(AIOCD) over elections of Cuttack District<br />
Chemist & Druggist Association. AIOCD<br />
had allegedly pressurized the USV group<br />
to terminate its supply contract as<br />
otherwise it would use its influence to<br />
prevent sale of the company’s drug in<br />
other states, the petition said.<br />
Meanwhile, CCI has ordered an inquiry<br />
into the allegations of using market<br />
dominant position by AIOCD to<br />
influence the supply of drugs from drug<br />
manufacturers. It has directed the director<br />
general to investigate the matter and<br />
submit its report in 45 days. USV is a<br />
leading healthcare company, which has<br />
a joint venture with a subsidiary of<br />
Revlon. Some of its product include<br />
Active Pharmaceutical Ingredients<br />
(APIs), Peptides, Biosimilars, Injectables<br />
and Ophthalmics and Solid Orals. 17 183<br />
16 http://www.phonesarchive.com/news/apple-is-facing-charges-for-anticompetitivepractices-in-india.html<br />
17 http://m.mydigitalfc.com/news/cci-grants-interim-relief-drug-stockiest-orissa-santukaagencies-692<br />
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[Vol. 2<br />
Competition Panel studying<br />
whether cartelisation led to rise<br />
in food prices<br />
I<br />
n<br />
the backdrop of rising prices of food<br />
articles, CCI has initiated a thorough<br />
“market study” into the agriculture<br />
sector to determine whether possible<br />
cartelisation has been the cause for it or<br />
not. Though the CCI is not conducting a<br />
probe into the matter yet, it could order<br />
an investigation under the Competition<br />
Act if the study throws up some<br />
indicative patterns in the food chain<br />
especially procurement. Apart from this,<br />
the CCI has also started similar studies<br />
into the steel and paper sectors as well.<br />
These initiatives have been taken by the<br />
CCI in exercise of its suo moto powers. In<br />
the recent past the CCI has also ordered<br />
probes into sectors such as civil aviation<br />
(for air fares), cement, sugar and tyre. 18<br />
Competition Commission of<br />
India (CCI) finds M/s BigFlix<br />
Pvt. Ltd., Mumbai not<br />
contravening Section 3 or<br />
Section 4 of the Competition<br />
Act, 2002<br />
As per the Information filed before the<br />
CCI, M/s BigFlix Pvt. Ltd. allegedly<br />
enjoys a dominant position in the relevant<br />
market of DVD rentals and has a<br />
tremendous market share being a part of<br />
Reliance Big Entertainment. The CCI<br />
observed that looking at the market<br />
structure, it could not be said that M/s<br />
BigFlix was enjoying a position of<br />
dominance in terms of Explanation (a) to<br />
Section 4 of the Competition Act, as there<br />
were other players also like Seventymm,<br />
Clikflix, Catchflix, CineSprite etc. which<br />
were having considerable presence in the<br />
relevant market. It was observed that there<br />
was no issue in this case which raised a<br />
competition concern. The CCI was of the<br />
view that the allegations made did not<br />
violate either Section 3 or Section 4 of the<br />
Competition Act and the information filed<br />
by the informants did not provide a basis<br />
for forming a prima facie opinion for<br />
referring the matter to the DG for further<br />
investigation. 19<br />
Lafarge, Holcim say Indian<br />
units involved in antitrust probe<br />
L<br />
afarge<br />
SA (LG) and Holcim Ltd., the<br />
world’s largest cement makers, have<br />
reported that their Indian subsidiaries have<br />
been accused by local competition<br />
regulators (CCI) of breaking India’s<br />
antitrust rules. Lafarge is amongst several<br />
cement manufacturers in India accused of<br />
violations under the Competition Act<br />
dating from 2005. Lafarge and Holcim are<br />
also facing probe from the European<br />
regulator into possible price fixing and<br />
import limits. Lafarge last year lost a<br />
challenge at the EU’s highest court, against<br />
a 249.6 million-euro ($357 million) antitrust<br />
fine in 2002 for its role in a cement cartel. 20<br />
18 http://www.financialexpress.com/news/competition-panel-studying-whethercartelisation-led-to-rise-in-food-prices/798656<br />
19 http://www.cci.gov.in/May2011/OrderOfCommission/SanjayOrder260711.pdf<br />
20 http://www.bloomberg.com/news/2011-07-28/lafarge-holcim-say-indian-unitsinvolved-in-antitrust-probe-1-.html<br />
184<br />
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2011] Statutes<br />
E-43<br />
Section E<br />
Statutes<br />
DRAFT ON NATIONAL COMPETITION POLICY FOR INDIA<br />
(Ministry of Corporate Affairs)<br />
Dated: 28 th July, 2011<br />
Ministry of Corporate Affairs had constituted a Committee under the<br />
Chairmanship of Shri Dhanendra Kumar, Former Chairperson of Competition<br />
Commission of India, for framing of National Competition Policy and related<br />
matters. The Committee had submitted a draft National Competition Policy to<br />
the Ministry on which the comments from chambers of the industries, Corporate,<br />
Law Firms, Members of Civil Society or other Stakeholders were invited. The draft<br />
policy is reproduced herein below:<br />
1. Introduction<br />
1.1 India, embarked on a new trajectory of economic liberalisation in 1991, when a<br />
host of controls on trade and industry were removed. The various reforms initiated<br />
recognised the need for removing various fetters on trade and industry with a view<br />
to unleashing the energy and dynamism of competition in the market. In his Budget<br />
Speech, Dr. Manmohan Singh, the then Finance Minister underlined, “no power on<br />
Earth can stop an idea whose time has come” and that “It is essential to increase the<br />
degree of competition between firms in the domestic market so that there are adequate<br />
incentives for raising productivity, improving efficiency and reducing costs” Since<br />
then, a host of new policy and regulatory reforms across various sectors have been<br />
introduced by the Government.<br />
1.2 After Independence, India pursued a strategy of planned economic development,<br />
with the objective of developing a broad industrial base to achieve speedy economic<br />
self-reliance and promoting social justice. The industrial policy assigned<br />
commanding heights of the economy to the public sector. The State exercised control<br />
over the direction, pattern and quantum of investments through the Industries<br />
(Development & Regulation) Act, 1951 and the Monopolies and Restrictive Trade<br />
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[Vol. 2<br />
Practices Act, 1969 (MRTP Act). A major part of the financial sector was also kept<br />
under Government control while a number of products were also subjected to price<br />
and distribution controls coupled with extensive reservations and concessions in<br />
favour of small-scale industry. The trade policy too affected competition by providing<br />
a high level of protection to domestic industry. These restrictions, which were in<br />
consonance with the National Strategic Policies at that time and relevant in the<br />
context of limited resources and need of checking monopolies and concentration of<br />
economic power, did nevertheless, impacted competition. However, gradually, and<br />
from 1980 onwards, incremental changes were brought in to usher in greater<br />
competition. The Industrial Policy Statement of 1980 introduced greater competition<br />
in the domestic market, technological up-gradation and modernisation. The major<br />
reforms initiated from 1991 onwards were, however, on a much broader scale, sweep<br />
and scope, and provided a new paradigm shift to economic growth in India, releasing<br />
new entrepreneurial energy and dynamism in the Indian industry, diversification<br />
of domestic production and stimulating exports, adding to the GDP growth.<br />
1.3 The last two decades since 1991 have witnessed significant changes in terms of<br />
opening of markets, factor mobility and regulatory environment. The benefits have<br />
been substantial and manifested in various segments of economy, e.g. telecom, civil<br />
aviation, transport, manufacturing, etc. However, the progress has been somewhat<br />
uneven, and so also the trickle-down effects on the common man. Underlying this<br />
success is a structural shift in India’s growth trajectory. Further, like many other<br />
similar economies under transition, there have been residual restraints and anticompetitive<br />
traits in several areas of economy. While the process of reforms is a<br />
continuing one, the pace and direction necessitates the introduction of an overarching<br />
National Competition Policy to realise the fuller growth potential of the economy.<br />
2. Competition, Competition Law, and Competition Policy<br />
What is competition?<br />
2.1 Competition refers to a situation in a market place in which firms/ entities or<br />
sellers independently strive for the patronage of buyers in order to achieve a<br />
particular business objective, such as profits, sales, market share etc. By responding<br />
to demand for goods and services with lower prices and higher quality, competing<br />
businesses are pressured to reduce costs, innovate in processes and products, invest<br />
in technology and better managerial practices and increase productivity. This process<br />
leads to achievement of static, dynamic as also resource/allocative efficiencies,<br />
sustainable economic growth, development and poverty alleviation.<br />
2.2 Competition is not an end unto itself, rather a means to achieve economic<br />
efficiency and welfare objectives. Importantly, competition is not automatic, and<br />
requires to be promoted, protected and nurtured through appropriate regulatory<br />
frameworks, by minimising market restrictions and distortions, and provision of<br />
related productive inputs such as infrastructure services, finance, human capital<br />
etc. However, a Competition Policy has to be evolved to imbibe the principles of<br />
competition in various endeavours of the Government, of course in alignment with<br />
the national strategic objectives, alongwith social, environmental, public safety,<br />
and other considerations.<br />
What are competition law and competition policy?<br />
2.3 Competition Policy means government measures, policies, statutes, and<br />
regulations including a competition law, aimed at promoting competitive market<br />
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structure and behavior of entitites in an economy. 1 Competition Law is but a sub-set<br />
of the Competition Policy. The Raghavan Committee had observed that<br />
“Competition law must emerge out of a national competition policy, which must<br />
be evolved to serve the basic goals of economic reforms by building a competitive<br />
market economy.”<br />
2.4 The World Trade Organisation (WTO) defines competition policy as:<br />
the full range of measures that may be used to promote competitive market<br />
structures and behaviour, including but not limited to a comprehensive<br />
competition law dealing with anti-competitive practices of enterprises. World<br />
Bank also provides a definition of competition policy as:<br />
government measures that directly affect the behaviour of enterprises and the<br />
structure of industry. An appropriate competition policy includes both - (a)<br />
policies that enhance competition in local and national markets and (b)<br />
competition law, also referred to as antitrust or antimonopoly law.<br />
2.5 Competition Policy is a broader term which includes all government policies<br />
and laws whereas competition law is specific statute with a pre-defined mandate to<br />
adjudicate on violation(s) of the law. In the case of India, the Competition Act, 2002<br />
deals with anti-competitive agreements such as price fixing, bid rigging, joint<br />
boycotts, etc. abusive practices undertaken by dominant entities such as predatory<br />
pricing, abusive conditions of supply, etc, and regulation of combinations. It would<br />
be seen that a competition law is a regulatory instrument to check the prevalence of<br />
anti-competitive practices whereas a competition policy is a proactive and positive<br />
effort to build a competition culture in an economy.<br />
The Difference between Competition Policy, Competition Law &<br />
Competitiveness<br />
Competition policy, competition law and competitiveness are three distinct<br />
concepts. Unfortunately, most of the policy community considers these<br />
terms synonymous and interchangeable, which is not the case. Competition<br />
Law is but a subset of Competition Policy. Besides encompassing the law,<br />
Competition Policy tries to bring harmony in all government policies that<br />
affect competition and consumers welfare, such as trade policy, industrial<br />
policy etc. There are many policies of the government which create anticompetitive<br />
outcomes.<br />
Further, many do not understand the distinction between competition<br />
and competitiveness, thus skewing the debate. Competition does lead to<br />
better competitiveness but it is not necessarily the other way. As per<br />
Michael Porter, competitiveness means ability of a firm or a nation to<br />
compete which is based on the country needs and effective competition<br />
policy and law to ensure that the market functions, and both consumers<br />
and the economy gains.<br />
1 Several agencies such as the World Trade Organisation (WTO), the World Bank, UNCTAD,<br />
etc. have attempted to define the terms competition policy. WTO (1999), “The Fundamental<br />
Principles of Competition Policy: Background Note by the Secretariat” Working Group on<br />
the Interaction between Trade and Competition Policy WT/WGTCP/W/127<br />
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3. Need for Competition Policy<br />
3.1 The 2001-Nobel Prize winner Joseph Stiglitz has rightly said:<br />
Strong competition policy is not just a luxury to be enjoyed by rich countries,<br />
but a real necessity for those striving to create democratic market economies.<br />
3.2 National Competition Policy is necessitated, as an overarching Policy framework,<br />
in continuation of the 1991-reforms, to infuse greater competition across sectors,<br />
and unleash fuller growth potential of the Indian economy. Faced with dynamic<br />
market realities, there is a need for promoting economic democracy, the forces of<br />
competition and transparency in markets in keeping with the rapidly changing<br />
market conditions to ensure the protection of consumer interests, while at the same<br />
time protecting the rights of market players to free and fair competition.<br />
3.3 The need for Competition Policy was also articulated by the Finance Minister in<br />
2009 2 when he underscored that:<br />
“Competition law alone is not sufficient for realising the gains from greater<br />
competition”. He further added that - “There is need to engage in advocacy<br />
with stakeholders, including public institutions, in order to build a culture of<br />
competition that is receptive to and supportive of the new competition regime.”<br />
3.4 Competition has a two-way linkage with various policies of the Government<br />
such as: fiscal policy, trade policy, investment policy, labour policy, consumer policy,<br />
environment policy, policy on intellectual property rights, sectoral regulatory<br />
policies etc.<br />
FDI Policy<br />
Competition Policy<br />
Trade Policy<br />
Industrial Policy<br />
Disinvestment Policy<br />
Fiscal Policy<br />
IPR Policy<br />
Labour Policy<br />
Procurement Policy<br />
... others ...<br />
All Government<br />
Policies that affect the<br />
functioning of markets<br />
Competition<br />
Law<br />
Competition Policy – a broad<br />
concept that seeks to harmonise<br />
all government policies<br />
3.5 While a series of reforms in various sectors have been introduced from time to<br />
time and on incremental basis since 1991, the progress across sectors has been<br />
relatively uneven. Notably, some sectors have successfully imbibed a competition<br />
culture, several other sectors still witness weak competition. An overarching policy<br />
2 Speech of Shri Pranab Mukherjee, Minister of Finance at the National Conference on<br />
Competition, Public Policy and Common Man; 16 th November, 2009, New Delhi<br />
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framework seeks to harmonise these efforts, which would help policy reviews by<br />
the concerned authorities in relevant sectors, including at Central, State and<br />
Sub-state level.<br />
3.6 There may exist barriers, both fiscal and others, at the state level, which may<br />
hinder inter-state trade. These restrictions may tend to fragment the national market,<br />
and impact freedom of trade. A sub-State authority is an extended arm of the<br />
Government, and includes municipalities, panchayats, housing boards, universities,<br />
professional institutes, roadways, corporations which may be created by statutes or<br />
other mechanisms but engaged in production, supply, distribution of goods or<br />
provision of services. Policies and practices of these state and sub-state authorities<br />
may influence competition in the relevant market significantly, and in fact may have<br />
greater and day-to-day impact on the common man and it may be desirable to<br />
introduce competition principles there too.<br />
3.7 National Competition Policy has been taken up for consideration in different<br />
fora within the Government at different points in time during the last two decades.<br />
The Government of India has expressed its intent and views on the need and form of<br />
the National Competition Policy on various occasions. An account of various<br />
developments so far has been presented in the Annexure–I to this document.<br />
4. Premise of Competition Policy<br />
4.1 The Constitution of India seeks to ensure for its citizens—social, economic and<br />
political justice. Article 19(1)(g) of the Indian Constitution provides “freedom to<br />
practice any profession, or to carry on any occupation, trade or business”.<br />
Articles 301-304 further elucidate the issues. In a judgment 3 the Supreme Court held<br />
that Article 301 provides freedom not from all laws but freedom from such laws<br />
which restrict or affect activities of trade and commerce among and within the<br />
States; and that Article 301 refers to freedom from laws which go beyond regulations<br />
which burdens, restricts or prevents the trade movements between states and<br />
within states.<br />
4.2 Competition Policy is widely recognised as a powerful tool to promote freedom<br />
of trade, efficient use of scarce resources, enhance productive efficiency, add to the<br />
static and dynamic efficiency of the economy, maximise economic growth and<br />
contribute to the welfare of the common man.<br />
4.3 The basic premise of the National Competition Policy (NCP) is to unlock fuller<br />
growth potential of Indian economy, which among other things could also help in<br />
tapping the opportunities arising from the demographic dividend in our country.<br />
It would seek to inculcate a competition culture across various sectors to induct<br />
greater efficiency and dynamism, bringing in innovation and technology, delivering<br />
goods and services which are competitive, thus contributing to accessibility for<br />
consumers and consumption and thereby accelerating economic development, global<br />
competitiveness, unleashing entrepreneurial energy, creating more jobs and<br />
opportunities to raise the living standards of people, thus ensuring inclusive growth.<br />
4.4 National Competition Policy may also help to promote good governance by<br />
transparency, accountability through competing responses and avoidance of rent<br />
seeking. It would also have a positive co-relation with other strategic national<br />
3 Jindal Stainless Steel Ltd. v. State of Haryana AIR 2006 2550<br />
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objectives like employment, R&D efforts and environmental objectives. It also respects<br />
the sovereign functions of the State like defence and security etc, and would seek to<br />
encourage competition related measures only in matters having economic impact<br />
on the market.<br />
4.5 The National Competition Policy is not dogmatic and is mindful of appropriate<br />
balance in matters having bearing on social, environmental, security and other<br />
strategic issues of national importance; the only thing is that a conscious view may<br />
have to be taken but the concerned authorities in balancing the competing<br />
considerations. It does not seek disinvestment, blanket deregulation, laissez faire<br />
markets, welfare cutbacks, and reduced social services. It does not seek to prevent<br />
government from increasing expenditure on welfare or levels of government-funded<br />
or subsidised social services, or maintaining government ownership of businesses.<br />
It explicitly recognises the need of government intervention in markets through<br />
optimal regulation, where it is justified. It seeks to strike a balance, of course with<br />
reasons, between competition policy objectives on the one hand, and other policy<br />
considerations such as prudential supervision, service quality, social service<br />
commitments, safety etc on the other.<br />
5. Benefits of Competition Policy<br />
5.1 The National Competition Policy seeks to address policies, practices and market<br />
structures that significantly lessen or harm competition. The objective of such a policy<br />
is to nurture and nourish competition and create a competition culture in order to<br />
foster greater efficiency in resource allocation and maximise total welfare. With the<br />
encouragement of competition and the maintenance of the competitive process,<br />
associated objectives of freedom of choice and access to markets are also achieved.<br />
5.2 A review of cross-country literature suggests a positive association between<br />
GDP growth and degree of competition. Many empirical studies of select industries<br />
in OECD countries suggest that competition enhances productivity at industry level<br />
and lowers consumer prices. 4 Enhancement of productivity is caused by the pressure<br />
generated by competition on firms to innovate or enhance efficiency of operations<br />
both of which are associated with lower costs. Higher productivity is also associated<br />
with enhanced output and therefore increased employment.<br />
5.3 Public procurement of goods or services is a key economic activity of governments<br />
accounting for 20-30 per cent of GDP in India as per estimates available. As per the<br />
findings of an OECD survey, savings to public treasuries between 17 per cent and 43<br />
per cent have been achieved in some developing countries through implementation<br />
of competitive procurement processes. In view of the huge public expenditure on<br />
procurement including in infrastructural sector, substantial savings can be achieved<br />
in India by infusing greater competition, which in turn could release resources for<br />
the much needed investment in social sector development in the country.<br />
5.4 Studies have outlined positive linkages between good governance and<br />
competition. It has been found that by lowering barriers to the entry of new firms,<br />
competition policy helps to create an enabling environment for entrepreneurial<br />
4 Eleventh Five Year Plan Report on Inclusive Growth, http://planningcommission.nic.in/<br />
plans/planrel/fiveyr/11th/11_v1/11th_vol1.pdf<br />
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development, an essential pre-requisite for a vibrant economy (OECD and Khemani<br />
1998). 5 Michael Porter in his book “Competitive Advantage of Nations” has outlined<br />
the role of government as a catalyst which should encourage companies to move to<br />
higher levels of competitive performance.<br />
5.5 To illustrate the growth benefits of competition, Bayoumi et al. (2004) 6 have<br />
estimated that differences in levels of competition account for more than 50 per cent<br />
of the current gap in GDP per capita between the Euro area and the United States.<br />
They conclude that more intense product market competition enhances growth and<br />
employment. Aghion et al. (2001) 7 and Dutz and Hayri (1999) 8 echo these views<br />
through their empirical work.<br />
5.6 There is extensive economic literature wherein the effects of competition<br />
distortions have been brought out. For example, in his book, the Power of Productivity,<br />
William Lewis says that one of the main obstacles to economic growth and poverty<br />
reduction in many countries is the many policies that distort competition. Similarly<br />
in the theory of political economy developed by Anne Krueger 9 and Gordon Tullock, 10<br />
the authors argue that in many market oriented economies, especially developing<br />
economies, like India, governmental restrictions upon economic activity are pervasive<br />
facts of life. These restrictions give rise to a variety of forms and people often compete<br />
for the rents.<br />
5.7 OECD 11 has observed that with the globalisation and increasing global<br />
integration, a large number of developing countries and transition economies are<br />
rapidly adopting competition legislation and are strengthening the existing<br />
competition policies. On future trends, OECD noted that:<br />
we can conclude that in the near future, competition policies will be the core<br />
policies in the countries that pursue constant economic development regardless<br />
of their current economic status.<br />
In view of the growing global recognition of the strong linkage between competition<br />
policy and the pillars of economic development, as evidenced in several countries,<br />
the OECD stressed:<br />
the building of a competition culture is the most important step to be followed<br />
by all countries that are committed to promote a more market based economy.<br />
5 Organisation for Economic Cooperation and Development and R. Shyam Khemani, 1998. A<br />
Framework for the Design and Implementation of Competition Law and Policy (Washington,<br />
World Bank).<br />
6 Bayoumi, T. Laxton D. and Pesenti P (2004), “Benefits and Spillovers of Greater Competition<br />
in Europe: A Macroeconomic Assessment”, Working papers<br />
7 Aghion, P., Harris, C., Howitt, P. and Vickers, J. (2001), “Competition, Imitation and<br />
Growth with Step by Step Innovation,” Review of Economic Studies 68<br />
8 Dutz, M. and Hayri A., (1999), “Does more Intense Competition lead to Higher Growth?”<br />
CEPR Discussion Paper, No. 2249<br />
9 Anne O Krueger, “The Political Economy of the Rent Seeking Society”, American Economic<br />
Review, Vol 64, No 3, June 1974.<br />
10 Gordon Tullock. “The Economics of Special Privilege and Rent Seeking”, Kluwer Academic<br />
Publishers, Massachussets, USA, 1989.<br />
11 OECD (2003), The Objectives of Competition Law and Policy and the Optimal Design of a<br />
Competition Agency. CCNM/GF/COMP/WD(2003)7<br />
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6. Objectives of National Competition Policy<br />
6.1 The National Competition Policy aims to promote economic democracy,<br />
achievement of highest sustainable levels of economic growth, entrepreneurship,<br />
employment, higher standards of living, and protect economic rights for just,<br />
equitable and sustainable economic and social development, and supports good<br />
governance by restricting rent seeking practices.<br />
6.2 In this background, the National Competition Policy will endeavour to:<br />
(a) preserve the competition process, to protect competition, and to encourage<br />
competition in the domestic market so as to optimise efficiency and maximise<br />
consumer welfare. This would also make domestic firms competitive globally,<br />
(b) promote, build and sustain a strong competition culture within the country<br />
through creating awareness, imparting training and consequently capacity<br />
building of stakeholders including public officials, business, trade associations,<br />
consumers associations, civil society etc.,<br />
(c) achieve harmonisation in policies, laws and procedures of the Central<br />
Government, State Government and sub-State Authorities in so far as the<br />
competition dimensions are concerned with focus on greater reliance on wellfunctioning<br />
markets,<br />
(d) ensure competition in regulated sectors and to ensure institutional mechanism<br />
for synergised relationship between and among the sectoral regulators and/<br />
or the CCI and prevent jurisdictional grid locks,<br />
(e) strive for single national market as fragmented markets are impediments to<br />
competition, and<br />
(f) ensure that consumers enjoy greater benefits in terms of wider choices and<br />
better quality of goods and services at competitive prices.<br />
7. Competition Policy Principles<br />
7.1 Taking into account the needs of and priorities for promoting a healthy<br />
competition culture the principles of the National Competition Policy are:<br />
(a) Fair market process - Market regulation procedures should be rule bound,<br />
transparent, fair and non-discriminatory. Public interest tests are to be used to<br />
assess the desirability and proportionality of policies and regulations, and<br />
these would be subject to regular independent review.<br />
(b) Institutional separation between policy making, operations and regulation,<br />
i.e. operations in and regulation of a sector should be independent of the<br />
government branch which deals with policy formulation in the sector and is<br />
accountable to the Legislature.<br />
(c) Competitive neutrality - Such as adoption of policies which establish a “level<br />
playing field” where government businesses compete with private sector and<br />
vice versa.<br />
(d) Fair pricing and inclusionary behaviour, particularly of public utilities and<br />
intellectual property rights holders, which could be imbued with monopolistic<br />
characteristics and a large part of the consumers could be excluded.<br />
(e) Third party access to ‘essential facilities,” i.e. requiring dominant<br />
infrastructure owners to grant to third parties access (e.g. electricity,<br />
communications, gas pipe lines, railway tracks etc) to their infrastructure on<br />
agreed terms and conditions and at regulated prices, aligned with competition<br />
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principles. Such treatment can be given to intellectual property rights as well<br />
if the IPR concerned possesses essential infrastructure characteristics.<br />
(f) Public Policies and programmes to work towards promotion of competition<br />
in the market place; and<br />
(g) National, regional and international co-operation in the field of competition<br />
policy enforcement and advocacy.<br />
8. Government Initiatives<br />
Central Government Initiatives<br />
8.1 The following initiatives are envisaged to effectively generate a culture of<br />
competition and to enhance competition in the domestic markets with the<br />
involvement of all the stakeholders:<br />
(i) Several existing policies, statutes and regulations of the Government restrict<br />
or undermine competition. A review of such policies, statutes and regulations<br />
from the competition perspective will be undertaken with a view to removing<br />
or minimising their competition restricting effect.<br />
(ii) Proposed policies, statutes or regulations that affect competition should be<br />
subject to Competition Impact Assessment, as outlined in subsequent<br />
paragraphs.<br />
(iii) Where a regulatory regime is justified, it should provide that the principles of<br />
competition would be taken into account in the regulation. Regulation needs<br />
to be diluted progressively as competition becomes effective in the regulated<br />
sector.<br />
(iv) The competition authorities need to be functionally autonomous and<br />
financially independent.<br />
(v) In order to ensure effective competition, third party access to essential facilities<br />
in the infrastructure sector owned by dominant enterprise on reasonable and<br />
fair terms should be provided.<br />
(vi) Incorporate competition clauses in bilateral and regional trade agreements,<br />
which will go a long way in preventing anti-competitive behaviour and<br />
potential anti-competitive cross-border conduct.<br />
State Government Initiatives<br />
8.2 The process of economic reform is incomplete unless it permeates to the level of<br />
State Governments. The initiatives at the State Government level would require<br />
undertaking pro-competition reforms keeping in mind the principles of the National<br />
Competition Policy. There are many economic areas of state legislations, regulations,<br />
policies and practices that impact or inhibit competition in the markets. The following<br />
are envisaged:<br />
(i) There may exist barriers, both fiscal and otherwise, which hinder inter-state<br />
trade. These restrictions tend to fragment the national market, which not only<br />
heightens the possibility of indulgence in trade practices adversely affecting<br />
competition but also hinder freedom of trade.<br />
(ii) The State Governments may volunteer to undertake a review of existing policies,<br />
laws or regulations from the competition perspective and also undertake a<br />
Competition Impact Assessment of proposed policy, law and regulations before<br />
these are finalised.<br />
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(iii) The State Governments may be encouraged to consult the implementation<br />
authority of the National Competition Policy.<br />
Sub-State Authority Initiatives<br />
8.3 A sub-State authority is an extended arm of the Government. It has wider<br />
connotation and may include municipalities, panchayats, housing boards,<br />
universities, professional institutes, roadways, corporations which are created by<br />
statutes but are engaged in production, supply, distribution of goods or provision of<br />
services. The following are envisaged:<br />
(i) The statutes, laws, procedures which govern the sub-State authorities may be<br />
reviewed so as to align them with the broad principles of the National<br />
Competition Policy.<br />
(ii) Such authorities will be encouraged to consult the implementation authority<br />
of the National Competition Policy on changes contemplated in the rules and<br />
procedures to ensure that competition is not undermined.<br />
9. Implementation Measures<br />
9.1 Institutional Arrangement to Enforce the NCP - The Government has already set<br />
up the Competition Commission of India and the Competition Appellate Tribunal<br />
to enforce competition laws. To further promote competition in the market place, the<br />
Government will establish and resource an agency, the National Competition Policy<br />
Council.<br />
9.2 The Government will encourage all Departments/Ministries of the Central, State,<br />
sub-State Governments to set up an in-house cell to undertake Competition Impact<br />
Assessment, as described below, of various policies, statutes, regulations/rules<br />
enforced by them.<br />
9.3 The National Competition Policy Council will inter alia:<br />
(a) Facilitate and provide technical assistance to the in-house cells of different<br />
government departments/ministries at the Central and state governments in<br />
undertaking competition assessment of the policies, laws, regulations and<br />
practices under their purview.<br />
(b) Promote and encourage involvement of consumer movement in implementation<br />
of the NCP by building their capacities and strengthening their resource base;<br />
(c) Encourage formulation, adoption and wide dissemination of Competition<br />
Policy Principles in all ministries, departments and bodies of the central<br />
government, state, sub-state governments, business and cooperative sectors to<br />
increase representation, accountability and transparency.<br />
(d) Undertake, or get undertaken through appropriate agencies/experts sectoral<br />
studies or reviews and make recommendations for fostering policies and<br />
practices that increase competition in the concerned sector.<br />
(e) Undertake measures to build capacity of government departments, ministries<br />
and other stakeholders.<br />
(f) Frame and administer an incentive scheme under which financial grants will<br />
be given to State Governments linked to the progress in aligning their policies<br />
and laws with the principles of the National Competition Policy.<br />
(g) Take measures to create public awareness and undertake advocacy, among<br />
various stakeholders, including consumer organisations.<br />
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9.4 Competition Impact Assessment - It has been envisaged that government<br />
departments and ministries will undertake Competition Impact Assessment to see if<br />
any anti-competitive effect is exerted by a provision in the policy/law/regulation/<br />
practice, enforced by them. An illustrative list of parameters for undertaking<br />
Competition Impact Assessment is enclosed at Annexure–II. The National<br />
Competition Policy Council will facilitate development of a Manual for undertaking<br />
Competition Impact Assessment suited to the local context.<br />
10. Review of the NCP<br />
10.1 There will be a review of NCP every five years from the date of notification of the<br />
NCP.<br />
10.2 An annual report of the work undertaken will also be submitted by the NCPC to<br />
the Government and will be available in the public domain.<br />
10.3 The Ministries/Departments of the Central Government, and the other State/<br />
Sub-State Bodies will undertake review of their laws, regulations, policies and<br />
practices, and submit annual reports to their appropriate Governments.<br />
11. Conclusion<br />
11.1 Indian economy after a slew of measures taken post-1991 is on a high growth<br />
path. In the recent years the Indian economy has been one of the strongest performers<br />
in the world. However, the full growth potential of the economy remains yet to be<br />
realised. Infusion of greater degree of competition can play a catalytic role in<br />
unlocking the fuller growth potential in many critical areas of the economy, which<br />
hitherto has been held back by restriction on competition in various forms. However,<br />
still much is required to be done in several endeavours of Central and State<br />
Government where a well-designed Competition Policy reflecting a broad consensus<br />
of major stakeholders, can play very useful and effective role. It would be desirable<br />
to undertake competition assessment of existing and proposed public policies that<br />
unduly restrict competition and develop specific and transparent criteria for<br />
performing competition assessment, including the preparation of screening and<br />
monitoring mechanism. Greater transparency and adherence to competition<br />
principles in different sectors and activities could ultimately boost India’s growth<br />
and help our country to attain a double digit growth on an inclusive and sustainable<br />
platform. Two decades after the first generation economic reforms of 1991 perhaps<br />
the National Competition Policy can provide the necessary push to unlock the fuller<br />
growth potential of the Indian economy.<br />
Genesis of Competition Policy in India<br />
Annexure - I<br />
Introduction<br />
As enumerated earlier, the process of economic reforms which had been initiated in<br />
1980s gathered pace and momentum in 1990s. The Industrial Policy Statement of<br />
1991 noted that operating in an over regulated environment was detrimental for<br />
competitiveness in the international economy and technological dynamism. There<br />
were major complementary policy reforms in the financial sector, especially in<br />
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banking, stock market and insurance. The same thread ran through other sectoral<br />
reforms like in telecom, civil aviation, manufacturing, and other infrastructure sectors<br />
where Public Private Partnership (PPP) was introduced in a big way. Alongside, a<br />
new competition law was enacted in 2002 and need for a Competition Policy was<br />
also articulated by the Government.<br />
National Competition Policy has been taken up for consideration in different fora<br />
within the Government at different points in time during last two decades.<br />
The Government of India has expressed its intent and views on the need and form of<br />
the National Competition Policy at various occasions. At the time when the<br />
Government of India was considering to bring in a new competition law, the then<br />
Finance Minister, during a debate in Lok Sabha 12 in 1999 informed the House that<br />
the Government will come out with a National Competition Policy. Prior to that,<br />
pursuant to WTO’s Singapore Ministerial Declaration in 1996, which established a<br />
Working Group on the Interaction between Trade and Competition to ostensibly<br />
propose the adoption of competition laws by member States, an Expert Group was<br />
established by the Union Ministry of Commerce in October 1997 to study the<br />
interaction between trade and competition policy in India, including anticompetitive<br />
practices and the effect of mergers and amalgamations on competition. In its report<br />
submitted in January 1999, the Expert Group suggested enactment of a new<br />
competition law and recommended harmonisation of competition principles,<br />
competition policy and objectives, and competition law enforcement efforts. This<br />
laid the ground for future developments in the direction of ushering in a National<br />
Competition Policy.<br />
(A) Raghavan Committee’s Recommendation on National Competition Policy<br />
Following the Government’s resolve to enact a new competition law, a High Level<br />
Committee on Competition Policy and Law (the Raghavan Committee Report) was<br />
set up, which in its report recognised the need for a National Competition Policy<br />
and noted that:<br />
An effective competition policy promotes the creation of a business environment<br />
which improves static and dynamic efficiencies and leads to efficient resource<br />
allocation, and in which the abuse of market power is prevented mainly through<br />
competition. Where this is not possible, it requires the creation of a suitable<br />
regulatory framework for achieving efficiency. In addition, competition law<br />
prevents artificial entry barriers and facilitates market access and complements<br />
other competition promoting activities. Trade liberalisation alone is not<br />
sufficient to promote competition and there is a need for a separate competition<br />
policy.<br />
(B) In 2004, the Common Minimum Programme of the United Progressive Alliance<br />
(UPA), also recognised the need for promotion of competition across sectors and<br />
noted that:<br />
Indian industry will be given every support to become productive and competitive.<br />
All regulatory institutions will be strengthened to ensure that competition is free<br />
and fair. These institutions will be run professionally.<br />
12 Lok Sabha (1999), “Further Discussion on the Insurance Regulatory and Development<br />
Authority Bill, 1999”, XIII Lok Sabha Debates, Session II (Winter Session), Thursday,<br />
December 2, 1999<br />
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(C) Standing Committee on Finance (2006-07) Observations<br />
The issue of a National Competition Policy was considered by the Standing<br />
Committee on Finance 13 (2006-2007) of the Fourteenth Lok Sabha while considering<br />
the relevant issues in the context of Competition (Amendment) Bill 2006. The<br />
Committee made a reference to the Competition Policy and recommended the<br />
inclusion of “state governments”, in addition to central government, within the<br />
ambit of competition policy provisions.<br />
(D) CCI Advisory Committee on National Competition Policy (2007)<br />
The Ministry of Corporate Affairs had asked the Competition Commission of India<br />
(CCI) in 2005-06 to draft a “Consultation Paper on Competition Policy”. Accordingly,<br />
an Advisory Committee, under the chairmanship of Dr. Vijay Kelkar was set up by<br />
the CCI wherein a sub-committee, under the chairmanship of Shri P. G. Mankad,<br />
was also set up to finalise a draft “Consultation Paper”. In the meantime, the<br />
Planning Commission Working Group, as referred to in the following para, submitted<br />
its report which was accepted by the Planning Commission in 2007. In September<br />
2007, the CCI Advisory Committee decided to adopt the report of the Working Group<br />
of the Planning Commission as the “final draft Consultation Paper on Competition<br />
Policy.<br />
(E) Planning Commission Discourse on the National Competition Policy (2007)<br />
The issue has been discussed at the Planning Commission in the context of Tenth<br />
and Eleventh Plans. During the mid-term appraisal of the Tenth Plan, it was<br />
recognised that there is an urgent need for articulating a National Competition<br />
Policy (NCP) in India, which should fully reflect the national resolve to accelerate<br />
economic growth, improve both the quality of life of the people of the country, national<br />
image and self-esteem. It further noted that NCP would bring about a competition<br />
culture amongst economic entities to maximise economic efficiency, protect consumer<br />
interests and improve international competitiveness. During the Eleventh Plan, a<br />
Working Group on Competition Policy submitted its report to the Planning<br />
Commission. In addition, the Eleventh Plan Document in chapter 11 made a reference<br />
to need for a competition policy. The Chapter 11 14 notes that:<br />
To strengthen the forces of competition in the market, both competition law and<br />
competition policy are required. The two complement each other. The competition<br />
law prohibits and penalises anti-competitive practices by enterprises functioning<br />
in the market; that is, it addresses market failures. Sector regulatory laws mimic<br />
competition in the areas of natural monopolies. Other regulatory laws, such as<br />
those for intellectual property or anti-dumping or even capital markets, too have<br />
an important interface with competition.<br />
The aim of the competition policy is to create a framework of policies and<br />
regulations that will inform other policies to facilitate competitive outcomes in<br />
the market. Competition policy is a critical component of any overall economic<br />
13 Lok Sabha Secretariat (2006), Forty Fourth Report – Competition (Amendment) Bill, 2006,<br />
Standing Committee on Finance (2006-2007) , December 2006<br />
14 Extract from Para 11.23 of Chapter 11 of the Policy Document: “Inclusive Growth” as part<br />
of the 11 th Five Year Plan adopted by the National Development Council in December, 2007<br />
(http://planningcommission.nic.in/plans/planrel/fiveyr/11th/11_v1/11th_vol1.pdf)<br />
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policy framework. Competition policy is intended to promote efficiency and to<br />
maximize consumer/social welfare. It also promotes creation of a business<br />
environment, which improves static and dynamic efficiencies, leads to efficient<br />
resource allocation and consumer welfare, and in which abuse of market power<br />
is prevented/curbed. It also promotes good governance by restricting rent seeking<br />
practices of economic actors.<br />
Given the wide canvas of NCP, a suggestion has been made by the Working<br />
Group on Competition Policy for setting up an institutional arrangement for<br />
monitoring the progress of the implementation of the policy. A small and compact<br />
Competition Policy Council of about 25 members could be set up which would be<br />
advisory, non-statutory and autonomous in its functioning and be headed by an<br />
eminent non-official person and comprising key officials from economic<br />
Ministries/Departments, and non-officials from media, academia and civil<br />
society. The task of the Competition Policy Council would be to review the progress<br />
in the implementation of NCP such as reviews of policies, regulations and<br />
practices, and the competition impact assessment of new laws, regulations and<br />
policies.<br />
Subsequent to the submission of the Report of the Working Group on Competition<br />
Policy, its recommendations, contained in a document titled ‘Inclusive Growth, Vol.<br />
I, as part of the 11 th Five Year Plan, were adopted by the National Development<br />
Council in December, 2007. 15<br />
(F) The Second Administrative Reforms Commission (ARC) Recommendations (2007)<br />
The Second Administrative Reforms Commission (ARC), chaired by Dr. M. Veerappa<br />
Moily, recommended that:<br />
Each Ministry/Department may undertake an immediate exercise to identify<br />
areas where the existing “monopoly of functions” can be tempered with<br />
competition. A similar exercise may be done at the level of State Governments and<br />
local bodies. This exercise may be carried out in a time bound manner, say in one<br />
year, and a road map laid down to reduce “monopoly” of functions. The approach<br />
should be to introduce competition along with a mechanism for regulation to<br />
ensure performance as per prescribed standards so that public interest is not<br />
compromised.<br />
Some Centrally Sponsored schemes could be restructured so as to provide<br />
incentives to states that take steps to promote competition in service delivery.<br />
All new national policies on subjects having large public interface (and<br />
amendments to existing policies on such subjects) should invariably address the<br />
issue of engendering competition.<br />
(G) Committee on National Competition Policy (2011)<br />
Continuing the pursuit of the core philosophy of promotion of competition<br />
across sectors, Ministry of Corporate Affairs, Government of India, vide Notification<br />
F.No.5/15/2005-IGC/CS dated 8 th June 2011, has now constituted the Committee<br />
on National Competition Policy and Related Matters (C-NCP) for:<br />
• Framing of a National Competition Policy (NCP)<br />
• Strategy for competition advocacy with government and private sector<br />
15 Planning Commission (2007), Eleventh Five Year Plan 2007-2012, Vol I - Inclusive Growth.<br />
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• Changes required in Competition Act for fine tuning it and<br />
• Any other matter relation to competition issues<br />
The Committee, after eight meetings, recommended the objectives, principles,<br />
initiatives and measures to be taken by the government.<br />
Annexure - II<br />
Illustrative List of Parameters for Undertaking Competition Assessment<br />
An illustrative list of parameters, some of which may be considered while<br />
ascertaining, if government policies or institutions limit competition may include:<br />
• Limits on the number or range of suppliers through<br />
Granting exclusive rights for a supplier to provide goods or services<br />
Establishing a license, permit or authorisation process as a requirement<br />
of operation<br />
Limiting the ability of some types of suppliers to provide a good or service<br />
Significantly raising cost of entry or exit by a supplier<br />
Creates a geographical barrier to the ability of companies to supply goods<br />
services or labour, or invest capital<br />
• Creates and fails to address natural barriers, strategic barriers, regulatory and<br />
policy barriers or gender-based barriers<br />
• Limits the ability of suppliers to compete through<br />
Limiting sellers’ ability to set the prices for goods or services<br />
Limiting freedom of suppliers to advertise or market their goods or services<br />
Setting standards for product quality that provide an advantage to some<br />
suppliers over others or that are above the level that some well-informed<br />
customers would choose<br />
Significantly raising costs of production for some suppliers relative to<br />
others (especially by treating incumbents differently from new entrants)<br />
• Reduces the incentive of suppliers to compete through<br />
Creating a self-regulatory or co-regulatory regime<br />
Requiring or encouraging information on supplier outputs, prices, sales<br />
or costs to be published<br />
Exempting the activity of a particular industry or group of suppliers<br />
from the operation of general competition law<br />
• Limits the choices and information available to customers<br />
Limiting the ability of consumers to decide from whom they purchase<br />
Reducing mobility of customers between suppliers of goods or services<br />
by increasing the explicit or implicit costs of changing suppliers<br />
Fundamentally changing information required by buyers to shop<br />
effectively<br />
The company while seeking approval of the directors and shareholders in their<br />
meetings shall specifically take approval to the effect that:<br />
(i) Proposed contract is competitive, at an arms length, without conflict of interest<br />
and is not less advantageous to it as compared to similar contracts with<br />
other parties.<br />
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(ii) The company has not made any default in repayment of any of its debts<br />
(including public deposits) or debentures or interest payable thereon and has<br />
filed its up to date Balance Sheets and Annual Returns with the Registrar of<br />
Companies;<br />
(iii) The proposed contract is falling within the provisions of Section 297 of the Act<br />
and provisions of Sections 198, 269, 309, 314 and 295 are not applicable in the<br />
proposed contract<br />
(iv) The company and its Directors have complied with the provisions of Sections<br />
173, 287, 299, 300, 301 and other applicable provisions of the Companies Act,<br />
1956 with regard to the proposed contract.<br />
The application will be processed online and approval of Central Government shall<br />
also be made available to the applicant company online on the basis of declarations<br />
made by the company and certifications by the professionals given in the e-form.<br />
If any of the information or declaration given by the company or certificate given by<br />
the professional in the e-form is found to be wrong, then the applicant company, its<br />
Directors and professional shall be liable for penal action under Sections 297 and<br />
628 of the Companies Act, 1956 in addition to penal action prescribed in regulations<br />
of the respective professional institutes.<br />
It may be noted that the Ministry of Corporate Affairs has been receiving<br />
representations form various stakeholders to simplify the approval processes under<br />
Section 297 of the Companies Act, 1956.<br />
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Guidelines for Contributors<br />
About CompLR<br />
<strong>Manupatra</strong> Competition Law Reports is a bi-monthly law journal which started in January 2008. It is the only journal in the subject in<br />
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