Ruling against DLF means more trouble for real estate

Smile if you're a home buyer! A Rs 630 crore fine on DLF serves notice on developers who make arbitrary changes to projects.

FP Editors August 17, 2011 09:41:22 IST

The decision by the Competition Commission of India (CCI) to slap a Rs 630 crore fine on DLF for unfair trade practices will be well-received by home buyers.

The penalty, which amounts to 7 percent of the average turnover of the company for the past three years, was imposed by the Commission after it found merit in complaints of the alleged "abuse of dominant position" by DLF after the company introduced "discriminatory and abusive clauses" in sales agreements with home buyers in two high-profile residential projects in Gurgaon.

The complaint against DLF Home Developers Ltd, a DLF group company, filed in 2008, primarily relates to completion delays and the firm increasing the number of apartment units in two projects without the consent of the allottees. The complaint was filed by the Belaire Owners' Association.

Ruling against DLF means more trouble for real estate

The Rs 630 crore fine on DLF is a hard knock for the financially beleaguered company. Adnan Abidi/Reuters

DLF Belaire and DLF Park Place, the two projects in question, were expected to have a total of 2,142 flats. The apartments in these projects, priced betweenRs 1.5 crore andRs 3 crore, were originally meant to be completed by end-2009, but the deadline was later extended to end-2011 by the company.

In addition, DLF decided to increase the number of floors from 19 to 29 in Belaire, which increased the number of apartments from 384 to 564 on the same land area without securing the consent of the allottees.

ML Lahoty, counsel for the petitioners, noted that DLF had violated norms in four key areas. "First, the company did not inform the buyers about the changes in the number of floors; second, as the project is already delayed by a year, there is no word on the delivery of the project till date; third, the company had unilaterally decided to charge buyers for the modification in the apartments' size, and fourth, the company brought changes in the apartments without any notice to buyers of the project," he said.

It was a view the Commission agreed with, Lahoty added. "In the view of the Commission, the conduct of DLF in abusing its dominant position requires to be taken very seriously and thus, the Commission is required to adopt a deterrent approach so that recurrence of such conduct is stopped," the CCI order said.

Changing the number of floors or even the layout of a housing project, and then charging buyers for those changes, are common practices in housing projects. For buyers who take mortgages to buy the home of their dreams, it can be quite galling to discover that a planned park for children within a housing complex has suddenly been changed into a parking lot or that the space allotted for a garden will be used to build another building.

The ruling paves the way for other disgruntled buyers across the country to legally challenge builders who arbitrarily make changes to project plans without taking the consent of home buyers as well as delay completion of projects. Tardy developers had better watch out. Most experts believe more developers could be fined for unfair practices going ahead.

"Some builders do have one-sided agreements with buyers. After this order, other aggravated buyers might explore the option of filing complaints with CCI against their builders," Saroj Jha, partner at SRGR Law Offices told The Economic Times newspaper. "The danger for the real estate industry is the government, egged on by public reaction to the order and clamour of buyers singed by delays and higher costs, may resort to some kind of regulation."

According to the Competition Act, DLF has 60 days to appeal against the ruling to the Competition Appellate Tribunal.

For the troubled developer, the fine comes at a very bad time. The real estate industry is already weighed down by high interest rates squeezing funds supply, delays in project approvals, relatively high residential prices and faltering buyer demand.

In the case of DLF, the CCI fine is equivalent tomore than half of the company's standalone profit for the year ended March 2011. Financially, the beleagueredcompany is not even scraping by. In the quarter to June, while revenues grew 21 percent from a year ago, operating margins contracted about 290 basis points (100 basis points make one percentage point), while net profit slumped by 13 percent from a year ago.

The company has heavy debt on its books. Gross debt is at Rs 24,000, which is 60 percent higher from a year ago. The company aims to sell land and some non-core assets worth about Rs 6,000 crore to repay its debt, but some analysts doubt its ability to do so, given that it managed to sell only Rs 168 crore of assets during the quarter. "Interest charge now comprises 20 percent of revenue -- the highest since listing," a report from JM Financial Research noted.

In a DLF results review, Emkay Securities said that interest costs are likely to climb higher. "Of the Rs 840 crore cash generated from operations, Rs 580 crore went towards servicing of debt. And with another 50 bps hike post the June quarter, the cash outflow towards the coming quarter would be higher on the same debt."

There's no relief in sight for DLF, but the luck of home-owners subjected to arbitrary decisions by developers might just have changed.

Watch video: In an interview on CNBC-TV18, Harsh Sehgal, head of the buyer association at DLF Park Place talks about the DLF order and its ramifications.

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