On October 26 2015 the Competition Commission of India (CCI) exonerated Jaypee Associates Ltd, Jaypee Infratech Ltd and Jaypee Greens (collectively, Jaypee) of alleged abuse of dominance in the market for the sale of residential apartments in New Okhla Industrial Development Authority (Noida) and Greater Noida. This decision shocked not only the complainants, but also market analysts in the real estate sector. Moreover, due to the diametrically opposite decision issued by the minority – which imposed a Rs6.7 billion penalty on Jaypee – a debate has inevitably arisen over the circumstances in which a real estate developer can be considered dominant over its competitors and whether the CCI's order is the final word in this regard.
By a majority order, the CCI found that Jaypee was not dominant in the relevant market. The order defined the 'relevant market' as the market for the "development and sale of residential apartments in Noida and Greater Noida regions" based on the following factors:
- the total number of projects for residential apartments which had been developed and launched;
- the total land reserves held; and
- financial resources.
The majority order was based on the some of the information found during the Directorate General (the investigative arm of the CCI) investigation. It noted that Jaypee's 25.09% market share (in relation to the number of projects launched and developed) was lower than its nearest competitor, Amrapali, which had a 27.32% market share between 2009 and 2011. Further, the majority held that there was sufficient competitive constraint on Jaypee to prevent any exercise of market power, as there were a number of other major market players (eg, Supertech Ltd (16.18 % market share), 3C (8.33% market share) and Unitech (6.82% market share)).
Similarly, in terms of land reserves, the 452 acres of land leased to Jaypee by the Greater Noida Industrial Development Authority in 2000-2001 and the 6,175 acres given as a part of the Yamuna Expressway were varied. As such, Jaypee's land could not be compared to the land allotted and leased to other builders so as to give any commercial advantages to Jaypee. Further, in relation to financial resources, Jaypee was found to be behind Unitech in terms of cash reserves and surplus (Unitech held Rs105.8 billion while Jaypee held Rs78.9 billion).
Unlike in the European Union and other advanced economies, under the Competition Act 2002 dominant position or market power is not determined solely based on market shares held, but instead on more economically sound factors, such as an enterprise's capability to act independently of competition in the market. This benchmark is subjective and requires a detailed analysis backed by statistical evidence. Another important premise is that dominant position must always be considered in the context of the market in which the accused enterprise operates. As defined under the act, 'relevant market' must be seen in terms of both the market for the product or service offered for sale – which in turn depends on the degree of substitutability with other similar products or services in terms of price, characteristics and end use – and the geographical region in which such offer is made. Thus, determining the correct relevant market is essential. The order against Jaypee aptly underscores the importance of determining the relevant market in antitrust litigation.
In the above context, the CCI's majority order is both interesting and striking. It is interesting because the majority order overruled the Directorate General's final determination that Jaypee was dominant in the relevant market. Notably, the Directorate General's findings changed over time. In its December 2013 report it found that Jaypee was not dominant, while in a December 2014 supplementary report it found that Jaypee had abused its dominance. Both reports were made based on the same evidence but used a different definition of 'relevant market' – a distinction on which the minority order based its decision.
The CCI's orders are striking not only due to the differing opinions regarding the delineation of the relevant market, but also due to the minority's dissent regarding the way in which the other evidence (ie, Jaypee's land reserves and final financial resources) was analysed.
While the majority order followed earlier decisional practice, finding the relevant market to be the market for the sale of residential apartments, the minority order narrowed the market to the sale of residential units in integrated townships. By narrowing the market, the minority found that Jaypee was dominant and abused its dominant position when it imposed unfair and one-sided conditions in its buyer agreements (which led to imposition of the original penalties).
Below is an analysis of the contradicting opinions in relation to the definition of 'relevant market' and the views on the evolution on the concept of relevant market and its applicability in real estate litigation.
In perhaps the CCI's most famous decision – the 2011 Delhi Land & Finance (DLF) case – the CCI held that "high-end residential apartments" could not be substituted with "low-end or mid-end apartments" and hence should be considered as a separate product (for further details please see "Impact of recent commission order modifying DLF buyers' agreement"). DLF was found to be dominant in the market and penalised for abusing its dominance. On appeal, the Competition Appellate Tribunal (COMPAT) upheld the definition of the relevant market. The final appeal is pending with the Apex Court.
However, in a more recent case,(1) the CCI adopted a broader definition of 'relevant market', considering the market in real estate cases to be the market for the provision of services for the sale of residential apartments. Notably, there was no dissenting opinion in this case. Arguably, this broader definition would include premium high-end apartments. However, if this is true, the CCI's definition of the relevant market adopted in Jaypee deviates from its earlier definition in DLF. In other words, the buyers in DLF did not believe that high-end apartments (costing more than Rs20 million) could be substituted with low or mid-range apartments costing Rs4 million to 6 million; unfortunately, this crucial price difference was overlooked by the CCI in Jaypee.
Integrated townships versus standalone residential apartments
In its December 2014 supplementary report the Directorate General defined the 'relevant market' in Jaypee to be residential apartments in integrated townships. The Directorate General held that integrated townships and standalone residential apartments are two distinct products and not similar enough for consumers to switch between them. According to the Directorate General, an integrated township is a mix of residential and commercial space, along with well-developed infrastructure and other recreational amenities (eg, schools, hospitals, shopping malls, golf courses, parks, entertainment centres, convention centres and gyms) within a marked area. Standalone apartments do not offer these facilities. As such, the residents of these apartments must depend on independent markets, hospitals and educational institutions located elsewhere. In contrast, the residents in an integrated township can avail of these services within the township. The minority order accepted the Directorate General's view in this regard.
While the CCI's majority order acknowledged the ever-changing landscape of demand and supply and in doing so recognised the concept of integrated townships, it held that this concept was nebulous and evolving and thus did not constitute a separate product market. Thus, the CCI rejected the idea that integrated townships are separate product markets, at least for now.
On the other hand, the minority order concurred with the Directorate General's finding. The minority held that as residential apartments in integrated townships offer a premium residential experience to residents, they should be considered as a distinct and separate product market.
Regardless of the merits of the minority order, arguably, the majority order should have taken a more detailed look at the distinction between standalone apartments and apartments in integrated townships before delineating the relevant market. Of particular importance is the way in which the CCI defined the geographic scope of the relevant market (Noida and Greater Noida). The CCI considered that the geographic regions of Noida and Delhi are distinct from the consumers' standpoint, as there are considerable price differences in the properties located in Noida and Greater Noida and Delhi. In particular, a small increase in the price of an apartment in Noida would not necessarily induce a person move to Delhi. In relation to antitrust, this vital test is referred to as the 'small but significant non-transitory increase in price' (SNNIP) test or the 'hypothetical monopolist' test. The CCI failed to consider this test when defining the relevant market.
While the CCI made a conscious effort to list all differences in the physical characteristics and other attributes of the integrated market, it failed to delve into the most important aspect: the price of standalone apartments compared to apartments in integrated townships. This is to say that, hypothetically, if a standalone apartment is available for Rs4 million and a residential apartment of a similar nature is available in an integrated townships for Rs6 million, would the consumer consider them substitutes for one another? Unfortunately, statistical analysis of this kind was missing from the majority order.
The majority order also failed to consider the Wanadoo test. This test was adopted by the European Commission to determine the relevant market in relation to high-speed internet access for residential customers. The European Commission examined the differences in performance between high and low-speed internet access and concluded that the differences were clearly perceived by consumers and that an analysis of price differences between them showed that consumers were prepared to pay a premium for the extra performance and convenience of high speed.
As already stated, the majority and minority orders listed various premium services available to buyers in residential townships as opposed to standalone apartments. However, a generic online search reveals that there is a significant difference in the price per square foot for the same types of apartment in standalone apartments compared with those in integrated townships. For instance, a three-bedroom apartment in JP Orchid (integrated township) costs Rs5,800 per square foot, compared to a three-bedroom apartment in Amarpali Crystal Homes (standalone apartment) which costs Rs4,400 per square foot.
Thus, the question becomes whether a buyer would move to an apartment in an integrated township at a considerably higher cost to benefit from the offered amenities and facilities? Perhaps. Either way, this situation represents a prime case for segmenting the market based on the buyer's inclination to pay premium prices in return for premium services.
Incidentally, the Wanadoo test was considered by the CCI when determining the relevant market in DLF. However, the CCI failed to apply this test in Jaypee.
Since the CCI rejected the Directorate General's findings, the present order cannot be appealed to COMPAT. Arguably, the CCI should have used a more statistics-based analysis of the relevant market by using modern econometric tools (eg, the SSNIP test or Wanadoo test) before reaching its final decision.
In a nutshell, the CCI's order shows that the analysis of relevant market has not yet resulted in settled jurisprudence for determining dominant position in the real estate sector. Nevertheless, the order serves as a warning for larger real estate players that may be imposing unfair or one-sided terms and conditions in buyer agreements, lest they be found dominant in their respective geographical region.
For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4929 2525) or email (email@example.com). The Vaish Associates website can be accessed at www.vaishlaw.com.
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(1) Pankaj Agarwal v DLF Gurgaon Home Developers Private Limited (CCI Case 13/2010).
An earlier version of this update first appeared in The Financial Express.