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COMPETITION COMMISSION OF INDIA
A REVIEW OF THE COMPETITION ISSUES IN THE REAL
ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST
DLF CASE
INTERNSHIP REPORT DECEMBER 2012
SUBMITTED BY:
Kirti Dashora,
IV Year, Gujarat National Law University (GNLU), Gandhinagar
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ACKNOWLEDGEMENTS The successful completion of this project could not have been completed without the valuable
guidance and insights of many people. I would like to thank Mr. Yogender Chaudhary,
Adviser (Law) for guiding me throughout my internship period. I would also like to thank Ms.
Bhawna Gulati, Deputy Director (Law) for providing me helpful suggestions regarding the
project. I also thank all the officers in the Commission who provided knowledge of the
working of the Commission during the rotation exercise. The library staff also provided help
whenever it was required.
A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
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TABLE OF CONTENTS ABSTRACT…………………………………………………………………………………5
OVERVIEW OF THE REAL ESTATE SECTOR IN INDIA…………………………..….6
Regulation of the Sector………………………………………………………..……7
The Real Estate (Regulation and Development) Bill, 2011………………………....7
ABUSE OF DOMINANCE IN THE REAL ESTATE SECTOR……………………..……9
Relevant Market…………………………………………………………………..…9
Assessment of dominance………………………………………………………..….9
Abuse of dominance…………………………………………………………….….11
BELAIRE OWNERS’ ASSOCIATION V. DLF LTD. & HUDA…………………..…….15
Other orders relating to DLF’s abuse of dominance……………………….………19
Implications of the order…………………………………………………..……….20
Consumers’ dilemma post DLF order……………………………………...………21 .
CARTELLIZATION IN REAL ESTATE…………………………………………....……24
Standard form contracts and Competition Law…………………………...….…….25
APPLICABILITY OF AFTERMARKET ABUSE TO THEREAL ESTATE SECTOR….27
Eastman Kodak Company v. Image Technical Services, Inc ………………….…..27
Switching costs………………………………………………………………….….28
Supplementary order in DLF case ……………………………………………..…..29
BUILDERS ASSOCIATIONS AND THEIR ROLE……………………………...……….32
CONCLUSION AND RECOMMENDATIONS………………………………....………..35
REFERENCES…………………………………………………………………….……….37
A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
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DISCLAIMER This project report has been prepared by the Author as an Intern under the Internship
Programme of the Competition Commission of India (CCI) for academic purpose only.
The views expressed in the report are personal to the Intern and do not reflect the view
of the Commission or any of its staff or personnel and do not bind the Commission in
any manner. This report is the intellectual property of the Competition Commission of
India and the same or any part thereof may not be used in any manner whatsoever,
without express permission of the Competition Commission of India in writing.
A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
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ABSTRACT
Henry Clay, American Secretary of State remarked in the 19th Century: “of all human powers
operating on the affairs of mankind, none is greater than that of competition.” Though
Competition is vital in all the sectors of the economy, it becomes imperative in a sector like
Read Estate since it has the inherent capability of affecting other sectors of the economy. This
project seeks to revisit the competition issues in the real estate sector in India, after the DLF
Order which has been hailed as “landmark” by many. The scope of the project is restricted to
the housing industry. It analyses the consumers’ position and also the industry position and
the proposed changes in the law governing the real estate sector.
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OVERVIEW OF THE REAL ESTATE SECTOR IN INDIA
The Indian Real Estate industry grew at a rate of 20% per annum in the five-year period prior
to 2010 to become the second highest employment provider after agriculture.1 The real estate
sector in any country plays a significant role in shaping the infrastructure. The importance of
the sector can be noted by the fact that a HUDCO-IIM, Ahmedabad study recently observed
that for every Rupee invested in this sector, the addition to the GDP of the State is 78 Paise.
Residential real estate is witnessing a continuous growth due to various factors like growth of
population, migration, growth in income etc.
The real estate sector in India suffers from inherent entry barriers. Initially acquiring land is a
difficult task for developers and even after that a number of issues like litigation, court orders
and cancellation of allotment of land are faced by the builders.
Source: CRISIL Indian Real Estate Overview
1http://www.icmrindia.org/casestudies/catalogue/Business%20Ethics/DLF%20and%20Indian%20Real%20Estate%20Industry-Case%20Study.htm
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Regulation of the Sector
The Indian Real Estate Sector is widely unregulated. Though there is some regulation in the
form of the various approvals mandated by the law for the developers, there is specifically no
regulator for the sector. According to a study carried out by FICCI and E&Y: “On the
Regulatory index amongst the countries surveyed India ranked last along with Russia
amongst ten countries surveyed namely - China; US; UK; Singapore; Germany; Brazil; UAE;
Russia; and India. Due to their developed real estate markets and streamlined regulatory
environment, developed nations such as the US, UK and the Singapore closely follow China
on the index. India ranks fifth on the overall index, as it scores better on the country economy
development index and the real estate market index, but fairly low on the regulatory index. In
developed countries, the regulatory framework is typically well-established, organized and
transparent. As such, the regulatory environment in such countries serves as an effective
watchdog. In contrast, the regulatory scenario in developing nations is at a nascent stage.
Consequently, developed countries lead the regulatory index.”
The need for a regulator in the real estate sector has been said to be more than that of a
regulator of stock exchange since real estate per se affects more consumers.2
The Draft Real Estate (Regulation and Development) Bill, 2011
The Real Estate Bill is a novel step and has the potential to curb the menace that has ensued in
the Real Estate Sector in the recent times, if proper implementation is ensured. The Bill seeks
to establish the Real Estate Regulatory Authority to see that the real estate sector functions
properly. It contains provisions for disclosures by developers on the estimated time by which
they will complete the projects, compulsory uploading of the proforma Builder Buyer
2 V Raghunathan, “Home buyer at the mercy”, Moneylife, September 6, 2012.
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agreements on the Regulatory Authorities’ website, online declaration of all project details.
There are various other provisions like equal rate of interest payable by the developer and the
buyer in case of any default, prohibition of false and misleading advertisement, undertaking of
clear title over land. It also provides that the real estate developer shall be required to deposit
at least 70% of the funds received from end customers into a dedicated project account, which
can be utilised only for the purposes of the project. No advance can be taken from the buyers
before first entering into an agreement with them. To check delays, registration can be
extended only up to two years beyond the original period for development granted by the
local licencing authority. The Bill also seeks to have proper coordination with the
Competition Commission of India (CCI) by providing in its Section 33 that if any issue comes
up before the Regulatory Authority relating to an “agreement, action, omission, practice or
procedure” which can lead to “prevention, restriction or distortion” of competition in the real
estate sector, it may refer the matter to the CCI.
It has been held by the Commission that sectoral regulators focus on the dynamics of specific
sectors, whereas the CCI has a holistic approach and focuses on functioning of the markets
through increasing efficiency through competition. In fact their roles are complementary and
to each other and share the objective of obtaining maximum benefit for the consumers.3
3 Shri Neeraj Malhotra v. North Delhi Power Limited, BSES Rajdhani Power Limited and BSES Yamuna Power Limited, Case No. 06/2009
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ABUSE OF DOMINANCE IN THE REAL ESTATE INDUSTRY
Relevant Market
The foremost issue in any abuse of dominance case is defining the “relevant market”. This is
important since dominance, if any, is assessed and analysed only in the perspective of the
relevant market. The relevant market comprises of the relevant product market and the
relevant geographical market. The attempt of the person bringing forward a case to the CCI is
always to define the relevant market in the narrowest possible manner while the Opposite
Party always tries to define it in a wide manner. It is on the CCI to view the situation and
decide what should be the relevant market, a decision that sometimes becomes very
controversial.
Relevant Product Market: It consists of the smallest set of close substitutes. Substitutability
is seen from the demand side as well as the supply side, that is, the products which a
consumer would find substitutable and those which the producer can shift to given his
existing facilities.
Relevant Geographical Market: It is the market wherein the conditions of competition are
fairly homogenous. For determining the relevant geographical market, various factors have to
be taken into consideration like: shipping costs, local specification requirement, regulatory
trade barriers, adequate distribution facilities, transport costs, language, etc.
Assessment of dominance
It is well settled law that before analyzing whether an enterprise has abused its dominant
position, it is paramount to first assess whether the firm is dominant in the relevant market or
not. Only if it is dominant does the case for abuse come in. In the Competition Act, 2002,
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there is no arithmetic criterion that can determine dominance in the market.4 The erstwhile
MRTP Act contained a 25% benchmark for a firm to be called dominant but this was removed
on the transformation to the Competition Act. The Act, however, enumerates the various
aspects which the Commission has to look into while assessing dominance. Dominance has
been said to be a position of strength enjoyed by an enterprise in a relevant market which
enables it to operate independently of the competitive forces prevailing in the dominant
market or affect its consumers or competitors or the relevant market in its favour.
The various factors given under S. 19(4) are as follows:
i. Market share of enterprise
ii. Size and resources of enterprise
iii. Size and importance of competitors
iv. Commercial advantage of enterprise over competitors
v. Vertical integration
vi. Dependence of consumers
vii. Dominant position as a result of a statue
viii. Entry barriers
ix. Countervailing buying power
x. Market structure and size of market
xi. Social obligations and costs
xii. Contribution to economic development
xiii. Any other factor
It has been observed by the Commission in its order in Poonam Gupta v. Unitech Ltd.5 case
that for an enterprise which has a presence throughout the country, a high Market
4 In South Africa, a firm is irrefutably considered to be dominant of its market share exceeds 45%. [Section 7(a) of the Competition Act, 1998] 5 Case No. 04/2012, along with Rohit Gupta v. Unitech Ltd, Case No. 05/2012
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Capitalization cannot be an indicator to determine its dominance in a particular market since it
may have little or no operations in that particular market.
In the case of Informant v. Cdr. Kuldeepak Mittal & Ors6, it was held that the Government
Officials Welfare Organisation (GOWO) (a Public Trust engaged in the business of
developing residential apartments for government officials in Noida and Gurgaon) did not
have a dominant position in the relevant market of Gurgaon since it was one of the builders
operating in the relevant market and had no definite advantage in terms of market knowledge,
economies of scale and experience. It further did not have any significant chunk of land
holdings with it in that geographical area.
A high market share of a firm is not a factor to conclusively determine that a firm is dominant.
It has to be seen in the perspective of the market shares of the competitors in the relevant
market. For example, if one firm has a market share of around 45 % and the rest of the
market is diffusedly divided among weak players, he may be considered dominant. However,
if the rest of the market is divided among key rivals, the doubt of dominance will be reduced.7
“Abuse” of the dominance
In the real estate sector, the “abuses” normally complained of are in terms of either unfair and
discriminatory terms in the Apartment Buyer Agreement or delays in the possession.
Unfair Terms of Contract
The Supreme Court of India in the case of Central Inland Water Transport Corporation Ltd.
and another v. Brojo Nath Ganguly8 held that parties to the agreement should be on equal
footing and with same bargaining power. In this context, it may be said that when a flat-buyer 6 Case No 62/2010 7 Raghavan Committee Report on Competition Law, AKZO Chemie v. Commission (1993) 5 CMLR 215. 8 (1986) 3 SCC 156
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enters into an agreement with a builder, the bargaining power is somewhat lacking. There is
usually a standard form contract which the buyer has to sign in case he wants to buy the
apartment. A contract between a buyer and builder suffers from an innate lack of equal
footing. It is a contract between a huge developer and an individual which suffers from
information asymmetry. It is a standard one sided agreement containing various unfair terms.
There are some states which themselves regulate the unfair, onerous and one sided
agreements between buyers and builders. A suitable example of this is the Maharashtra
Ownership of Flats Act, 1963. It has a number of provisions to ensure that the builder is not
able to harass the buyer.
Delays by builders
According to a report by a property research firm Propequity, nearly half of the 9,30,000
under construction residential units in India, scheduled to be delivered between 2011 and
2013 are likely to be delayed by up to 18 months.9 According to real estate research firm
Liases Foras, nearly half of the 3,23,000 homes that were to be delivered in 2013 will be
delayed; and a third of these won’t be ready before 2015.10 Developers announced a lot of
projects in the pre 2008 crisis time but were unable to complete these due to a funding crunch.
The worst performer was NCR with only about 23% of the projects completed by January
2012. The reason for this is said to be that the projects were very large and so the developers
were not able to complete them on time.11
9 http://beta.propequity.in/PressRoom/Sep13ET_Large.jpg 10 Ravi Teja Sharma & Vijaya Rathore, “Aggreived Buyers Speak Up Online ! Real estate firms resort to online reputation managment on social media”, Economic Times, Nov 28, 2012 11 Varnika Kukreja, “When will I be delivered my house? A big question faced by most of the developing firms in India; which has put a full stop on the dreams and aspirations of an average common man”, Property Observer, June 22. http://beta.propequity.in/PressRoom/June22PO_Large.jpg
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When there are such delays by the builder, the buyer faces huge losses. In a situation when a
person buys an apartment in order to save the money he/she has to incur every month on the
rents in the current accommodation and there are delays by the builder in handing over
possession. The buyer can nowhere see the project being completed for years together. In
such a scenario, not only does the buyer have to pay the regular rents but has to also pay the
EMI’s for the flat he/she has purchased but not got. The buyer gets fixed in a trap and is
unable to get out of it.12
The perspective of the developers on the delay in the projects is that this delay is due to the
multifarious sanctions and approvals that are to be taken by them in respect of all projects.
They estimate that these approvals take around 2-3 years and hence propose that there must be
a single window clearance with which it is possible to procure the approvals within 4 weeks.
12 Namrata Kohli, “DELAY, DEFAULT AND DECEIT: The 3Ds Plaguing The Real Estate Industry, How Should a Buyer Or An Investor Deal With This Triple Malaise”, The Times of India, Sept 29, 2012.
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With respect to construction approvals, “Doing Business”, a report by World Bank and
International Finance Corporation ranked India at 177 out of 183 countries in 2011 and the
position further deteriorated in 2012 at 181 out of 183 countries.
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BELAIRE OWNER’S ASSOCIATION V. DLF LIMITED AND HUDA13
Contentions of the Informant:
The informant (Belaire Owners Association) in this case contended that DLF Ltd had abused
its dominant position and inflicted several unfair and arbitrary terms of contract on the
apartment allottees of the Group Housing Complex, “the Belaire”. In specific, the informant
has pointed out the following points in support of the contention that DLF had abused its
dominant position:
i. Each of the five multi storied buildings was to originally have 19 floors each with a
total of 368 apartments. However ignoring the fact that this was the basis on which the
allottees booked their flats, DLF constructed 29 floors in each building.
ii. DLF had conferred on itself the exclusive right to reject and refuse to execute any
Apartment Buyers Agreement without assigning any reason for doing so. It could
further carry out any changes in the layout plan for which the consent of the allottee
shall not be a necessity and if any amount is liable to be returned in respect of
preferential location charges to the allottees on account of such change, it would not
be refunded but adjusted in the last installment without any interest.
iii. Time is made of essence with respect to the payment obligations of the allottee but not
the performance of DLF.
iv. In case of failure by DLF to deliver the possession, the allottee is obligated to give a
notice to terminate the agreement. DLF is not bound to refund the money but gets the
right to sell the apartment and only thereafter repay the amount.
v. DLF has unilaterally reserved to itself the right to create any lien or mortgage to raise
finances. In case of non-payment, the allottee becomes the direct sufferer.
13 2011 CompLR 0239 (CCI)
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vi. The penalties for delay by the respective parties are highly non-commensurate. The
allottee is to pay 15% for the first 90 days of delay and 18% after 90 days whereas
DLF is obligated only to pay Rs 5 per sq ft for every month of delay (which is 1% p.a)
vii. Between the date of booking and the date of execution of the ABA, the allotee had
already paid amounts to the tune of Rs 85 lakhs without knowledge of the unfair terms
that would be included in the ABA. Thereafter, there was delay in taking the necessary
approvals by the company and before the construction was even started, DLF had
around 33% of the consideration in its pocket.
Relevant Market:
High End residential accommodation in Gurgaon
Contentions of the Opposite Party
DLF contended at length that it is not a Dominant Player in the relevant market. It pointed out
that a number of competitors exist in the market and there is stiff competition and further that
there are no impediments to the entry of new players. It explained its high turnover with the
fact that it has presence in other markets also. It was also contended that the conditions
included in the agreement are the “usual practices” adopted by the builders and are part of
industry practice. DLF also contended that the allotees had various options in respect of
making a choice of buying an apartment and also signed the agreement after considering all
the pros and cons in respect of their investment.
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Order of the Commission
The CCI observed that while assessing dominant position of an enterprise, the sole factor is
not the market share of the enterprise in the relevant market but a host of other factors are to
be seen which are enumerated in S. 19(4) of the Competition Act, 2002. It analyzed the
various factors and came to the conclusion that DLF is dominant in the market of Gurgaon.
After looking at the various one sided terms of the agreement and the condition of the
consumers in this case, DLF had abused its dominant position.
The following are the sixteen clauses in the Apartment Buyers Agreement which were
considered to be unfair by the Commission:
i. Unilateral changes in the agreement and the power to supersede and substitute the
terms of the agreement with respect to subsequently approved lay out plans without
the consent of the apartment allottees;
ii. DLF’s right to change to layout plan, again without the consent of the apartment
allottees;
iii. Discretion of DLF to use areas owned by the allottees in the compound for other
purposes like residential, commercial;
iv. It was mandatory to pay preferential location charged paid up-front, but when the
location was unavailable, the refund would of the amount of his last instalment
(without any interest);
v. Unilateral right of DLF to increase and decrease super area with consent of allottees
who had to bear the price of this right, by being coerced to make additional payments
as and when necessary;
vi. DLF has the right to substitute the method of calculating the proportionate share in
ownership of the land beneath the building and/ common area and facilities even
though the allottees has already been promised he owns a certain amount of land;
vii. The allottees have no rights in regard to the community recreational facilities;
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viii. The current project underway (‘Belaire’) can be linked to another one at the sole
discretion of DLF which would alter the ambience and quality of living, which is the
main reason that allottees have decided to invest in the project in the first place;
ix. DLF made it mandatory for the allottee to pay any extra external charges that would
arise during the construction;
x. Arrangement of the supply of power to the apartments and their rates are in the hands
of DLF can be levied as and when desired;
xi. Arbitrary forfeiture of amounts paid by the allottee as earnest money, brokerage
charges etc;
xii. No exit option for the allottees, in case possession is not handed over and even in that
event the money is refunded without interest after the apartment has been sold to
someone else. DLF had minimized any loss possible for itself but had maximized
losses for the allottee in every situation;
xiii. DLF at any point can abandon the project without any penalty. In case possession is
not handed over within three years of the agreement, DLF is liable only to refund the
amount paid by the apartment allottee with a simle interest at 9% per annum for the
period such amount was lying with DLF. If the project is delayed beyond three years,
compensation will be paid at a mere 5%.
xiv. Allottees have no rights relating to alterations of the building;
xv. Third party rights created to raise finance/loan, which is to the detriment of the
allottees without their consent;
xvi. Penalty in case of default of payment for the allottees is at a rate of 15% for the first
ninety days after which it would at 18% per annum.
The CCI imposed a penalty of Rs. 630 crores for abusing its dominant position in the relevant
market of Gurgaon by imposing unfair conditions in its agreements with the flat buyers. DLF
was ordered to “cease and desist” from imposing such unreasonable conditions with buyers in
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Gurgaon and modify such conditions within three months from the date of receipt of the
order.
Competition Appellate Tribunal (COMPAT)
The fine imposed by CCI has been stayed by the Competition Appellate Tribunal (COMPAT)
on being approached by DLF. The COMPAT has also ordered DLF to submit the draft of the
modification to the contentious terms of the agreement within eight weeks.
Other orders relating to DLF’s abuse of dominance
i. DLF Park Residents v. DLF Ltd14: In this case, while the agreement had been made
on one premise of building 19 floors in each tower, DLF subsequently scrapped the
project and started constructing a new project with 29 floors in each tower without
informing the buyers. This led to unreasonable delay in the completion of the project.
Since the contravention committed by DLF in this case was similar to that in Belaire
Owners’ Association v. DLF and hence no separate penalty was imposed on DLF.
ii. M/s Magnolia Flat Owners Association & Others. v. M/s. DLF Universal Limited &
Others: In this case, after the payment of 90 percent of the sale consideration by the
buyers, DLF wanted to change the building plan thereby increasing the number of
floors. The agreement also contained various one-sided clauses. DLF was ordered to
cease and desist from imposing such unfair conditions and to suitably modify the
terms of the agreement within three months.
14 Case no. 18 of 2010
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Implications of the DLF Order
For Real Estate Players:
The order of the CCI has wide implications for the other real estate players in the market. The
former DG at CCI remarked that the order will send “strong signals to the real estate market”.
DLF in its contentions had alleged that the practices adopted by it are part of industry practice
and are followed by all the builders in the market. Several other builders also have similar
clauses in their agreements with their flat buyers. The CCI, in its order has also urged various
state governments and the central government to come out with real estate regulations to
ensure that the consumers do not suffer in the hands of such one sided agreements and other
practices which are detrimental to the interests of the consumers as a whole. For DLF itself,
the “cease and desist” order could prove a hurdle in launch of new projects. Though the
penalty has been stayed by the COMPAT, the same is not true for the “cease and desist”
order. Hence it is quite possible that DLF will not be able to launch new projects using the
same agreements.15
This order is significant in the sense that it is the first instance in India where competition law
has covered the “exploitative” nature of abuse of dominant position. The jurisprudence earlier
relied mainly on “exclusionary” abuses like predatory pricing or refusal to deal etc.16
Exploitative abuse takes within its ambit those behavior patterns on the part of firms which
have a direct detrimental effect on consumers. Hence it should be a precedent for the real
estate companies who must now themselves try to ensure that they so not face any similar
situation in their future.
For Consumers:
15 Dilasha Seth, “Amid calls for fairer buyer pacts, DLF launches in face of CCI order”, Business Standard, Dec 06, 2012. 16 MM Sharma and Vaibhav Choukse, “Impact of Competition Law on Indian Real Estate Sector: An analysis of Order against DLF”, 2012 CompLR B-111.
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The order in the DLF case has been hailed by a number of consumers who have faced similar
harassments in the hands of the builders as faced by the informants in that case. Many of
those consumers have also approached the CCI with similar claims of abuse of dominant
position. Buying a home is the biggest financial investment of a person’s life and hence it
becomes very disappointing when there are delays or unfair practices in that.
Consumers Dilemma post DLF Order
It has been seen that after the passing of the DLF order imposing penalty, a series of 200
complaint letters have been received by the Competition Commission of India in relation to
similar claims, 15 of which were official cases17. It has been alleged that several other
builders have also adopted similar practices as those adopted by DLF and similar “unfair”
agreements have been made by them.
CASES DISMISSED BY THE CCI BECAUSE OF THE LACK OF DOMINANT POSITION
Name of the Real Estate Company Date of Dismissal
DLF Ltd Nov 27, 2012
Dwarkadhis Proj Pvt Ltd, Delhi Oct 11, 2012
Supertech Noida Oct 4, 2012
Purearth Infrastructure Ltd Aug 7, 2012
Senior Builders Ltd and Pacific Greens Infracon Pvt Ltd July 19, 2012
17 Dilasha Seth, “Competition Commission flooded with complaints against realtors”, Business Standard, March 25, 2012, New Delhi.
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Universal Buildwell Ltd July 26, 2012
Emaar MGF May 16, 2012
Unitech May 8, 2012
HSIIDC Ltd Apr 4, 2012
Omaxe Feb 21, 2012
Hirco Developments Feb 9, 2012
Kolkata West International City Jan 24, 2012
Exact Developers Jan 12, 2012
Today Homes Jan 12, 2012
Raheja Developers Dec 21, 2011
The crucial point to be seen in this regard is the overlapping of the jurisdictions of the CCI
and consumer forums.18 Mostly, the allegations that the Apartment buyers are putting forward
are in the nature of mere consumer disputes. Though the preamble of the Competition Act,
2002 reads in its ambit the protection of consumers interest also, it cannot overtake the role of
the consumer forums. Many consumers have regarded the DLF judgment as their protector
and have approached the CCI. It is further pertinent to point out that the abuse of dominant
position provisions can be applied against an enterprise only when it is first dominant. It is
due to these reasons that in a majority of cases the CCI has held that there is no prima facie
case and left the option open to the consumers to approach an appropriate forum.
18 “Housing” has been included in the definition of “service” in Section 2(o) of the Consumer Protection Act, 1986.
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Mr Vinod Dhall, former acting Chairman of CCI said in relation to the order: “Real estate
sector was waiting to get some kind of discipline…But this does not mean that CCI has
become a consumer court. Both have different roles. CCI’s role comes in only where
competition is affected.”19 The consumers approach the CCI in regard to practices of the
developers. However, CCI can only take up a case when it affects competition in the market,
that is to say CCI’s eyes are to see malpractices in the market and not to do justice in regard to
individual consumer cases. Considering this point in mind, the CCI has dismissed a number of
cases regarding real estate developers since there was no competition issue in those cases.
19 Moumita Bakshi Chatterjee, “Competition panel order on DLF project may send strong signal to unregulated realty market”, Business Line, Aug 17, 2011.
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CARTELIZATION IN REAL ESTATE?
Another competition issue that can be considered in the real estate sector is that of
cartellization. It was DLF’s own contention that the agreements used by all the builders are
the same as these are part of “industry practice”. DLF has alleged: “The conditions included
in the agreement are ‘usual conditions’ as per industry practice and thus cannot be said to
have been imposed by abuse of dominant position. Since the clauses of the agreement
objected to are usual clauses as per industry practice and adopted by other competitors also
in their respective agreements to meet competition it is necessary to incorporate such clauses
in order to remain competitive.” It may hence be possible to see collusion in these practices
and if such collusion is indeed found, an action for cartelization can be taken against the real
estate companies.20 The CCI is considering a suo motu investigation to see whether the real
estate companies have colluded and are using the same techniques to harass the consumers.21
In considering the point of cartelization, however, a difficulty arises. Three essential factors
have been identified to establish the existence of a cartel, namely agreement by way of
concerted action suggesting conspiracy; the fixing of prices; and the intent to gain a monopoly
or restrict/eliminate competition.22 A mere parallel behavior on the part of enterprises is not
punishable under the Competition law unless it is a result of a concerted practice. Concerted
practice entails the meeting of minds.23 The problem becomes less difficult where there is a
formal agreement between the parties. In the Competition Act, 2002 agreement includes any
arrangement or understanding or action in concert. Hence it may be possible that all real
estate companies or most of them follow similar practices and conclude similar agreements
with their buyers, but the threshold of meeting “action in concert” will be a difficult task for
20http://www.nishithdesai.com/New_Hotline/Competition/Competition%20Law%20Hotline-%20Final%20-%2012%209%202011.pdf 21 http://www.track2realty.com/verdict-may-open-pandoras-box-for-real-estate-sector/ 22 ITC Ltd v MRTP Commission (1996) 46 Comp Cas 619 23 Pranjal Prateek, “Parallel Behavior and Agreements: Where is the dividing line?”, Comp LR 2011 B-193
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the CCI. Mostly the companies do not enter into formal agreements in relation to
cartelization. In the US case of Theatre Enterprises, Inc. v. Paramount Film Distribution
Corporation24, it was observed by the US Supreme Court that the business behavior of a firm
is a circumstantial evidence from which an “agreement” may be inferred. Recently, in the
case of Consumer Online Foundation v. Tata Sky Ltd and Ors25., the CCI expressed its
opinion in relation to the controversy of “agreement” in the following words:
“The definition of cartel under Section 2(b) of the Act has the phrase “by agreement among
themselves” as its fulcrum. For any “practice” to be considered as concerted action, the facts
must be counterpoised on that fulcrum of “by agreement amongst themselves”. Such
“agreement” should not be adduced, assumed or arrived at through eliminative or wishful
reasoning but must be concluded through amassment of undisputable evidences. The
establishing of joint mens rea of non-competition is imperative.”
It has been held in the case of Commission vs. Bayer AG26 that it is sufficient that the parties
to the agreement have expressed their joint intention to conduct themselves in the market in a
specific manner. As regards the form in which the common intention is expressed, it is
sufficient for a stipulation to be the expression of the parties’ intention to behave on the
market in accordance with its terms.
Hence, it may be pointed out that if the CCI wants to prove cartelization it will need to prove
that the firms have “agreed” to act in concert and mere parallel behavior will not be sufficient.
Standard form contracts and Competition law
A standard form contract should meet the standards of three laws: contract law, consumer
protection law and competition law. In the former two, the contract would not face any
24 346 US 537 (1954). 25 MANU/CO/0011/2011. 26 (2004) 4 CMLR 13
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problems unless its terms are unfair. However, to bring it within the violation of competition
law, it is not necessary that the terms should be unfair, even the fact that firms have colluded
in making the contract adversely affects competition in the market. One factor which gives a
clear suspicion of cartelization is the use of similar terms in the contracts of most of the
builders or developers. This is the concern of standardization of the terms of an agreement.
Though it is said that initially standardization can give rise to ease in comparison of the
products or services offered by all the producers but it can also weigh down competition in
the market.27 Analyzing the competitive effects of the standardization, it may be said that
from this aspect, even if the terms are not unreasonable, they have the effect of reducing
competition among firms. Another point in this regard is the involvement of consumers. If the
consumers have a chance to express their views in regard to the contract, for example, in case
of an insurance contract if they have a say in the covered areas, the suspicion of anti-
competitive behavior is diluted.28 If all or most firms use similar standard form agreements, it
gives rise to a second level of standardization. This may be harmful in the sense that the
consumers will not be able to take refuge from unfair terms even if he switches to another
producer or service provider. Hence, this concern should be addressed and the issue of
standard form contracts and their impact on competition law should also be looked into.
27 Mark R. Patterson, “Standardization of Standard form contracts: Competition and Contract implications”, William and Mary Law Review, Vol 52, No.2, 2010 28 Moore v. Boating Industry Ass’n, 819 f.2d 693, 703 (7th Cir. 1987); Consolidated Metal Products, Inc. v. American Petroleum Institute, 846 F.2d 284, 295 (5th Cir. 1988);
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AFTERMARKET ABUSE AND ITS APPLICABILITY TO REAL
ESTATE SECTOR
In the supplementary judgment by Mr. R Prasad, the concept of aftermarket abuse as laid
down in the case of Eastman Kodak Co. v. Image Technical Services has been highlighted and
applied in the context of the real estate sector. Before analyzing whether this can indeed be
applied to the sector, it would be pertinent to first understand the facts of the Kodak case.
Eastman Kodak Company v. Image Technical Services, Inc
In the case of Eastman Kodak Company v. Image Technical Services, Inc29., et al. the theory
of after-market abuse was propounded. The case related to denial by Kodak to supply its
equipment parts to Independent Service Operators (ISOs) which had begun servicing Kodak
photocopiers and micrographic equipments in 1980’s. The ISO’s provided maintenance
services normally 15-30% below the price charged by Kodak. Kodak’s action was aimed at
making it more difficult for ISOs to compete with Kodak in servicing Kodak equipment.
Kodak even went on to the extent of ensuring that equipment owners do not buy more parts
than they would reasonably require. This was challenged by the 18 ISO’s in 1987 before the
Court on the ground that the act of Kodak was in violation of Article 1 (Tying) and 2
(monopolization and attempt to monopolize) of the Sherman Act. It was alleged that Kodak
used its monopoly over parts to monopolize the service market and had tied its service labour
to parts and thereby had adversely affected competition in the service market. The plaintiffs
subsequently withdrew the tying claim and the only claim that remained was of
monopolization in the service market of high volume photocopiers and micrographic
equipments.
29 504 U.S. 451 (1992)
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The district court in the matter ruled against Kodak and issued a ten-year injunction requiring
Kodak to sell its parts to the ISO’s at non-discriminatory prices. Against this, Kodak appealed
to the Ninth Circuit and mainly put forth three questions30:
i. Can Kodak be required to sell patented parts and copyrighted service software and
manuals?
ii. Can “all Kodak parts” be a relevant market, despite the lack of substitutability
between two different parts?
iii. Can a firm be convicted of monopolizing its aftermarkets without first being found to
have obtained supracompetitive systems profits or prices?
All these three points were decided against Kodak by the Ninth Circuit. It was held that
Kodak was involved in Aftermarket abuse.
Switching Costs
In simple terms, switching costs are those costs which a consumer expects to incur if he shifts
to another product instead of continuing with the current one. Here, it may be said that
defendant manufacturer can be found to have sufficient market power in an aftermarket only
if the following conditions are established31:
(1) high switching costs faced by consumers;
(2) consumers lack the necessary information before sale to engage in life-cycle pricing to
determine the total cost of owning the primary good; and
(3) after locking in the consumers, the manufacturer undertakes changes in the policies or
behavior which are detrimental to consumers.
30 Jeffrey K. MacKie-Mason and John Metzler, Links between Markets and Aftermarkets: Kodak (1997), The Antitrust Revolution- Economics, Competition and Policy, Oxford University Press, Fifth Edn, 2009. 31 David A.J. Goldfine, Kenneth M. Vorrasi, “The fall of the Kodak Aftermarket doctrine: Dying a slow death in lower courts”, 72 Antitrust Law Journal No. 1 (2004).
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It is widely established, even in the Kodak judgment that if the switching costs are very high,
the consumer is more likely to be locked in and bear some level of price increases in the
aftermarket. Consumers facing high switching costs are vulnerable to aftermarket exploitation
because they are unwilling and unable to shift to another brand to avoid supracompetitive
aftermarket prices.32 Hence considering this approach of the consumer of being more likely to
be locked in instead of incurring high switching costs, it becomes pertinent to note that when
the consumers are indeed locked in, the producer or supplier can abuse this and get involved
in post sale opportunistic behavior. In the real estate sector, it may be said that the consumers
are faced by high switching costs. If, after buying a flat they realize that the developer is
inflicting unfair treatment, he is more likely to suffer the abuses instead of incurring the high
costs to switch.
Supplementary order in DLF case and the applicability of Aftermarket
Abuse to Real Estate sector
One of the members of the CCI passed a supplementary order in the case. While agreeing to
the majority judgment, he said that the Aftermarket abuse rule applies in the case of real estate
transactions. After carefully highlighting the judgment in the Eastman Kodak Case, he went
on to point out that in the case of real estate also there are two markets: one where the buyer is
looking for a suitable flat and the other where he/she has already entered into an agreement
with a developer. He said that once the agreement is concluded, it is by virtue of the
agreement that the builder acquires dominance in the market. It was brought within the ambit
of Section 19(4)(g) which says that a firm may “otherwise” acquire monopoly or dominance.
“Otherwise” was interpreted widely enough to include an agreement.33 The reasons for the
possibility of such an aftermarket abuse were concluded to be high switching costs and
32 David A.J. Goldfine, Kenneth M. Vorrasi, “The fall of the Kodak Aftermarket doctrine: Dying a slow death in lower courts”, 72 Antitrust Law Journal No. 1 (2004). 33 DLF Park Place Residents Welfare Associations v. DLF Ltd., Case no. 18/2011
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information asymmetry. It was further held that the agreements created an appreciable adverse
effect on competition in India because the high switching costs for on the part of the buyers
would foreclose the market for new entrants.
When we analyze Aftermarket abuse from the perspective of real estate, it may be said that
since real estate is a big investment, people are quite careful in regard to buying a flat. When a
person buys a house and is faced with such unfair terms of contract, it is very disappointing
for him since once he is locked in with one developer, he cannot then withdraw and go to
another developer considering the huge amounts of money already paid. Hence, real estate as
a market has a characteristic of high switching costs. It is one sector where there are a number
of big players, some of whom are very huge and have a high market power. To the extent of
high switching costs and locking in of consumers, the doctrine can be applied to real estate
sector. However, the essence in which the doctrine is understood generally and even in the
Kodak case entails two markets: one market of the product itself and the other of servicing or
maintenance. Due to locking in, the firm seeks to abuse in the servicing or maintenance
market.
The application of the doctrine to real estate sector in the supplementary judgment has been
done to constitute the condition before the signing of the Apartment Buyer Agreement as one
market and the condition after the agreement as the second market. It has also been ruled that
dominance is acquired by virtue of the agreement. In a hypothetical case, if a player, not as
big as DLF, enters into an agreement with a buyer and includes similar clauses as those
included by DLF in the impugned case. The firm has very nominal market power. The
question arises as to whether it can be said that due to the agreement the firm has acquired
dominance? Having nothing close to a “dominant” position in the market as such, can the firm
be considered dominant merely because of the agreement? If the application of the doctrine is
stretched too far, then every builder in every market will be held to be a dominant player since
dominance is held to be acquired through agreement. It is suggested that the point of
acquiring dominance through agreement should only be an additional consideration for the
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CCI and not the sole consideration. The idea of “locking in”, “information asymmetry” and
“high switching costs” can be applied to the case of real estate sector. However, if the
aftermarket doctrine is applied in a counterfactual sense, and dominance is held to be acquired
through an agreement, then every case against a real estate developer which comes before the
CCI will be decided against the developer. In such a scenario, every developer in India will be
held to be abusing his “dominant position”.
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BUILDERS ASSOCIATIONS AND THEIR ROLE
In India, trade associations have been assisting members on cartelisation even during the
golden days of the MRTP Commission. In 1977, the MRTP Commission had to issue a “cease
and desist” order to the Indian Woolen Mills Federation after it had facilitated a price fixing
cartel among its members.34
Canadian Competition Bureau Interim Commissioner John Pecman in his speech recently
remarked: “Trade associations face unique compliance issues. They are naturally exposed to
greater risks of anti-competitive behaviour because they provide a forum that may encourage
competitors to collaborate. For this reason, compliance programs are of the utmost
importance to trade associations.”
Trade Associations in general can play a very significant role in ensuring that there is
competition in the market. By setting standards for the members to follow, they can get
compliances from the players.
UK
National Federation of Builders (NFB) is a prominent builder association in the UK. It
recently launched an industry wide code of conduct which mandates that UK construction
companies should meet the highest level of competition law compliance. The Code of
Conduct35 puts an obligation on construction companies to comply with EU and UK
competition law and states that each individual construction company is accountable for its
own compliance with competition law and that the consequences of breaching competition
34 Pradeep S Mehta, “Trade Associations as cartels”, Financial Express, October 13, 2011 35 Available at: http://www.builders.org.uk/resources/nfb/000/304/443/Competition_law_code_of_conduct_-_August_2009.pdf
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law are severe including possible penalties, director disqualification, criminal sanctions and
damages actions.
It further states that Construction companies will therefore endeavour to:
i. ensure that competition law compliance will be achieved through implementing
effective competition compliance policies and guidelines throughout their businesses;
ii. Promote an understanding of and compliance with competition law throughout their
supply chains, including with their sub-contractors.
It further, in very clear terms states that the construction companies shall not engage in anti
competitive agreements, collusive bidding and shall not share competitively sensitive
information or engage in discussions that may lead to the co-ordination of competitive
behaviour and, in particular, must not share information about current or future pricing
intentions for tenders, or any element that might affect prices or pricing practices, including
the exchange of cover prices.
Indian Position
Recently the CCI has undertaken the task of looking at whether any competition law
violations are committed or facilitated by trade associations.36 Trade Associations must be a
means to ensure the growth of the industry and see that concerns which cannot be put forward
in individual capacity can be done through associations. They must not turn into a platform
for firms engaging in anticompetitive behavior. In the Real Estate sector, the Confederation of
Real Estate Developers Association of India (CREDAI) is the association which has more
than 6000 members and functions through various chapters. The CREDAI has issued a
transparency code to ensure that transactions in the real estate sector take place in a lucid and
ethical manner. The “code of conduct” covers relevant guidelines like launching projects
36 http://www.cci.gov.in/images/media/News/news09/datacurbs.pdf
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only after getting all approvals, detailed area statements of the saleable area, uniform
agreement clauses for all buyers, terrace rights, conveyance of 100 per cent UDS , delivery as
per commitment etc.37
37 Neha Nagpal, “CREDAI’s code of conduct fills a void of regulatory authority in Indian realty”, The Times of India, Dec 27, 2012
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CONCLUSION AND RECOMMENDATIONS
On the Indian Real Estate Sector in general:
The real estate sector in India is plagued by the requirement of around 52 approvals for every
project that is proposed to be undertaken by them. This leads to a time period of two to three
years differing from state to state.38 In such a scenario, it is a major concern that even though
the Real Estate Bill makes promising provisions, it will just be another “approval
requirement” for the developers.
Among industry players, when asked about the provision of the Bill they found most
regressive, 47% opted for mandatory registration of each project with the Real Estate
Regulatory Authority. The other opinions were as follows39:
• 20% said it was the requirement to keep 70% of the amount realized in a project in a
separate account and use it only for the purposes of the said project
• 17% said that the most regressive provision was the prohibition from receiving any
advance without first entering into an agreement with the buyer.
• 15% opted for the provision that maximum two years extension can be provided after
the expiry of the initial period of completion of the project.
Considering these points, it is recommended that there should be attempts made to reduce the
amount of approvals required to be taken by the developers. Developers have time and again
brought forward the demand for single window clearance in the sector.40 If the Real Estate
Regulatory Authority cannot be made a single window clearance immediately, attempts
should be made towards that direction and to see that this Authority does not end up
becoming another “approval” for the developers. Again, as regards competition, the Authority
38 Realty Decoded, FICCI-E&Y Indian Real Estate Report 2010. 39 Emerging Trends in Real Estate, Grant Thornton-CII Report 2012. 40 “CREDAI code of conduct to ensure transparency”, The Hindu, June 18, 2011.
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must ensure proper coordination with the CCI and the two bodies must work together to
improve the face of the Indian Real Estate Industry.
On the role of Builders Associations:
CREDAI must embark on the responsibility of ensuring that the developers do not try to
become larger than the competitive forces in the market. Specifically after a case like DLF
has come before everyone, it is expected that the association must take a proactive step to
ensure the code of conduct laid down by it is followed and any violations should be seen
strictly. Further, specific guidelines to ensure competitiveness in the real estate market are the
need of the hour. International practices in this regard should be taken into consideration and
best practices should be adopted by the associations in India. It must also undertake
monitoring of the competition compliances by the firms under its ambit.
On practices in the real estate sector:
The practices in the real estate sector relating to the practice of making standard form
contracts containing unfair and discriminatory terms should be checked so that competition in
the market is not harmed. Delays in the projects and changes in the layout without the consent
of the buyer should be also checked. It is hoped that most of the concerns will come to an end
when the Real Estate Regulator is brought in and starts functioning.
On the role of the Competition Commission of India:
The CCI must now play a role in looking into the agreements entered into by various
developers with their customers. There is a possibility of inquiring into the practices from the
perspective of cartelization. The conditions of purchase that various developers put forward
are similar in nature. If collusion in the same is proved, it can become a very good case for
CCI to look into and impose penalties if any violation is found.
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REFERENCES
Articles 1. Benjamin Klein, “Market Power in Aftermarkets”, Managerial and Decision
Economics, Vol 17, 143-164 (1996).
2. Daniel J Gifford, “The Damaging Impact of the Eastman Kodak Precedent Upon
Product Competition: Antitrust Law in Need of Correction”, 72 Wash. U. L. Q. 1507
(1994)
3. David A.J. Goldfine, Kenneth M. Vorrasi, “The fall of the Kodak Aftermarket
doctrine: Dying a slow death in lower courts”, 72 Antitrust Law Journal No. 1 (2004).
4. Enno Eilts, “Restricting Competition: Land Agreements at Shopping Centres and
Airports”, [2011] Comp Law, Volume 10, Issue 2, 154.
5. M Holmes, S Murphy, “Shopping centre assessments- some tips for the UK from
other jurisdictions”, (2010) Competition Law Insight, 11, July.
6. Mark R. Patterson, “Standardization of Standard form contracts: Competition and
Contract implications”, William and Mary Law Review, Vol 52, No.2, 2010
7. MM Sharma and Vaibhav Choukse, “Impact of Competition Law on Indian Real
Estate Sector: An analysis of Order against DLF”, 2012 CompLR B-111.
8. Pranjal Prateek, “Parallel Behavior and Agreements: Where is the dividing line?”,
CompLR 2011 B-193
Books 1. D.P Mittal, Competition Law and Practice, Taxmann, 2nd Edn, 2008.
2. Jeffrey K. MacKie-Mason and John Metzler, Links between Markets and
Aftermarkets: Kodak (1997), The Antitrust Revolution- Economics, Competition and
Policy, Oxford University Press, Fifth Edn, 2009.
A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
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Newspaper Reports 1. “CREDAI code of conduct to ensure transparency”, The Hindu, June 18, 2011.
2. Dilasha Seth, “Amid calls for fairer buyer pacts, DLF launches in face of CCI order”,
Business Standard, Dec 06, 2012.
3. Dilasha Seth, “Competition Commission flooded with complaints against realtors”,
Business Standard, March 25, 2012.
4. Moumita Bakshi Chatterjee, “Competition panel order on DLF project may send
strong signal to unregulated realty market”, Business Line, Aug 17, 2011.
5. Namrata Kohli, “DELAY, DEFAULT AND DECEIT: The 3Ds Plaguing The Real
Estate Industry, How Should a Buyer Or An Investor Deal With This Triple Malaise”,
The Times of India, Sept 29, 2012.
6. Pradeep S Mehta, “Trade Associations as cartels”, Financial Express, October 13,
2011
7. Ravi Teja Sharma & Vijaya Rathore, “Aggreived Buyers Speak Up Online ! Real
estate firms resort to online reputation managment on social media”, Economic
Times, Nov 28, 2012
8. V Raghunathan, “Home buyer at the mercy”, Moneylife, September 6, 2012.
9. Varnika Kukreja, “When will I be delivered my house? A big question faced by most
of the developing firms in India; which has put a full stop on the dreams and
aspirations of an average common man”, Property Observer, June 22.
Reports 1. Emerging Trends in Real Estate, Grant Thornton-CII Report 2012.
2. Realty Decoded, FICCI-E&Y Indian Real Estate Report 2010.
A REVIEW OF THE COMPETITION ISSUES IN THE REAL ESTATE SECTOR: AN ANALYSIS OF THE POSITION POST DLF CASE
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Web Sources 1. http://www.icmrindia.org/casestudies/catalogue/Business%20Ethics/DLF%20and%20
Indian%20Real%20Estate%20Industry-Case%20Study.htm
2. http://beta.propequity.in/PressRoom/Sep13ET_Large.jpg
3. http://beta.propequity.in/PressRoom/June22PO_Large.jpg
4. http://www.nishithdesai.com/New_Hotline/Competition/Competition%20Law%20Hot
line-%20Final%20-%2012%209%202011.pdf
5. http://www.track2realty.com/verdict-may-open-pandoras-box-for-real-estate-sector/
6. http://www.builders.org.uk/resources/nfb/000/304/443/Competition_law_code_of_con
duct_-_August_2009.pdf
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