The CCI order on Jaypee Group serves a warning signal for large real estate players to be cautious before imposing unfair and one-sided terms and conditions in the flat buyer agreements on prospective buyers
The Competition Commission of India’s latest order, dated October 26, 2015, exonerating Jaypee Associates Ltd and Jaypee Infratech Ltd (Jaypee Greens) from allegations of abuse of dominance in the market—for sale of residential apartments in Noida and Greater Noida—has shocked not only the complainants but also market analysts observing the real estate sector. At the same time, two members of the commission, in their dissenting order, have imposed a penalty of R666 crore on the Jaypee Group. It has generated a debate on the moot issue as to under what circumstances can a real estate developer be considered dominant over its competitors and whether this order of CCI is the final word for the real estate sector?
In this case, by a majority order, CCI has, inter alia, noted that Jaypee cannot be considered as dominant in the “relevant market” which was determined by the majority order as the market for “development and sale of residential apartments in Noida and Greater Noida regions” in terms of three identifiable indices—the number of projects of residential apartments developed/launched, the land reserves held and the financial resources. The majority order notes that with 25.09% market share in terms of the number of projects launched/developed, Jaypee was behind its near competitor Amrapali with a 27.32% market share during the period 2009-11. It also notes that the presence of a number of other major players—such as Supertech Ltd with a 16.18% market share, 3C with a 8.33% market share, Unitech with a 6.82% market share, etc—is sufficient to provide enough competitive constraint on Jaypee to prevent any exercise of market power.
Similarly, in terms of land reserves held, the land measuring about 452 acres leased to Jaypee by the Greater Noida Industrial Development Authority in the year 2000-01, combined with 6,175 acres given as part for Yamuna Expressway, was of varying nature and not comparable to the land allotted/leased out to other builders by statutory authorities so as to give any commercial advantages to Jaypee over its competitors. Further, in terms of financial resources too, Jaypee was found to be behind Unitech in terms of cash reserves and surplus (R10,580 crore of Unitech as compared to R7,898 crore held by Jaypee).
On the other hand, curiously enough, the minority order finds that in terms of the same three indices named above—with 67% market share in terms of number of dwelling units, land resources and financial resources available at its disposal—Jaypee is far ahead of its competitors and hence in a dominant position. However, even if one was to ignore the contradictory findings on facts based on the three indices mentioned above, the minority order concludes the dominance of Jaypee mainly on the basis of its definition of relevant market, which it narrows down to the market for sale of residential flats in integrated townships as against the market for sale of residential flats per se by the majority order.
To clear out the confusion, let me emphasise that unlike the practice in the European Union and some other advanced economies, the determination of dominant position or market power in India, under the Competition Act, 2002, does not depend solely on market shares held but on more economically sound factors such as the capability of an enterprise to be able to act independently of competition in the market, which is very subjective and requires a detailed economic analysis backed by statistical evidence. The other most important premise is that the dominant position is always to be seen in context of the “relevant market”, in which the enterprise accused of any violation of the Act operates. The relevant market, as defined under the Act, has further to be seen in terms of both market for the product or service, which, in turn, depends upon the degree of substitutability with other similar products or services in terms of price, characteristics and end use, offered for sale, as well as the geographical region in which such an offer is made. Thus, determination of correct relevant market is the sine qua non for finding the market position of an enterprise or a group. Significantly, the order against the Jaypee Group aptly underscores the importance of relevant market towards the outcome of any antitrust litigation.
In the above context, this CCI order is both interesting and striking. It is interesting because the majority order overruled the final findings of the director general, the investigating arm of CCI, recommending that Jaypee being dominant in the relevant market has abused its dominance, based on the same evidence though differing with the director general on the substantial definition of the relevant market, which is on what the dissent is made. The striking aspect of the CCI order is that the dissent is not only on the delineation of the “relevant market” but also analysis of the way the evidence on the other two indices—land reserves and financial resources—of Jaypee has been analysed.
On the “relevant market”, the majority order follows earlier decisional practice and decides the relevant market as the market for sale of residential apartments to analyse the dominant position of the Jaypee Group. However, the minority order narrows down the product market to the market for sale of residential units in integrated townships.
But there is another important angle that seems to have escaped the attention of CCI, which is whether the market is for all types of residential flats or are there different segments within it based on the price of the apartments? This segmentation was conspicuously noted by CCI in the 2011 DLF case, where CCI held that the “high-end residential apartments” were not substitutable with the “low-end or mid-end apartments”, and hence should be considered as a separate product. DLF was found dominant in the market for high-end apartments and was penalised for abusing its dominance. In the appeal, the Competition Appellate Tribunal also upheld this definition of the market. The final appeal is currently pending with the Supreme Court.
However, in the Jaypee case, both the majority and minority order of CCI overlook this segmentation. We believe that the demand of low-cost houses is not substitutable with the demand for high-end and costly apartments or, say, penthouses, and ignoring this crucial aspect vitiates the market definition adopted by CCI now. For instance, in the automobile sector, different segments of cars such as A segment, B segment, etc, form different relevant product markets.
Therefore, regardless of the merits of the minority order as to whether integrated townships form a separate market or not, the CCI order serves a warning signal for large real estate players—whether in standalone projects or integrated townships—to be more cautious before imposing the same set of unfair and one-sided terms and conditions in the flat buyer agreements on prospective buyers, lest anyone of them may face the brunt of severe penalties if found to be dominant in their respective geographical regions considering that the concept of relevant market is yet to evolve. The current Jaypee case is a significant landmark decision towards that evolution.
The author, based in New Delhi, heads the competition law practice at Vaish Associates, Advocates, a corporate, tax and business advisory law firm in India. Views are personal