The Competition Commission of India has imposed a penalty of Rs 630 crore on real estate developer DLF, for abusing its dominant position.
The commission said that DLF had a dominant position in the market for high-end residential properties in Gurgaon, and it imposed unfair conditions on consumers who had booked flats in these properties.
The case was filed by Belair Owner’s Association, representing a group of people who had booked flats in a project in DLF City in Gurgaon. They contended that DLF abused its dominant position to impose one-sided conditions in their sale agreement.
The key disputes arose from an increase in the project size from 19 floors to 29 floors and delays in obtaining requisite permissions. When flat owners delayed their payments, citing project delays, their allotments were cancelled and deposits forfeited, and others were penalised.
The commission held the conditions imposed by DLF on the buyers as unfair and in its order has directed DLF and its group companies, to cease and desist from making and imposing such conditions on its projects in Gurgaon. DLF has three months in which to modify these unfair conditions imposed on flat purchasers.
While determining the penalty, the commission said that the abuse of its dominant position pertains to the basic need of housing. DLF has been held guilty of abusing its dominant position against consumers who are vulnerable and do not possess the resources to act against such abuse. No leniency is required to be shown, as its actions were to secure undue economic gains and profits, says the order. The commission says that the abuse needs to be taken seriously and a deterrent approach is needed to prevent recurrence.
The commission has hence considered it appropriate to impose a penalty of 7% of the average turnover of the past three years, which works out to Rs 630 crore.
The company is, of course, free to appeal against the order and fight it out till the last.
But the order itself is unique for several reasons:
- The quantum of fine being imposed is unprecedented. DLF earns revenues many times this amount but if it has to ultimately pay the fine, it will hurt its financials and investor sentiment. In the quarter ended June (Q1), its revenues rose by 16% over the year ago period to Rs 2,503 crore and its profit after tax fell by 13% to Rs 358 crore.
- The order roundly castigates the conditions imposed by DLF on buyers, making the process of buying an apartment a very one-sided affair. Among its various defences, DLF also argues that these are conditions imposed by all real estate developers, which in effect implies that most real estate developers impose one-sided conditions on buyers.
- Examined under the lens of corporate governance, a company abusing its dominant position to impose unfair conditions will lose some of its sheen in the investor community. Arguing it is an industry practice does nothing but confirm what investors have always feared, that the real estate sector’s practices are not all above board, and continue only because they are left unchecked by the state.
- The commission has confirmed that buying of a house is an activity that can be covered under the competition law. This may well set the stage for other groups of flat-buyers, who may be similarly aggrieved, to approach the CCI for redressal.
- The order has defined Gurgaon as an area where DLF has dominance in the high end residential market. Therefore, it has also set a precedent for how to determine the area of influence of a particular developer, and also to segment the market further to assess whether the developer has or does not have a dominant position.
- The CCI order deplores the state of affairs in the industry and seeks to highlight the problems faced by common consumers and has decided to ask the centre and states to pass laws or set up regulators who can regulate the industry. This is long overdue. Will the CCI order stir states out of their slumber? Consumers will certainly hope so.
- The DLF share was down by 6% on Tuesday. The company will perhaps come out with a statement on its future course of action against the order.