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A Long Way To Go

The Draft Real Estate Regulation Bill that was released recently is a good beginning, but it has too many loopholes.

For many, if not most people, buying residential property is the biggest investment they make in their lifetime. It's the largest chunk of money they spend in their lives and if we add the emotional payback of owning a house of one’s own, then this investment has the highest returns too. However, for most of us, choosing and buying a house is a less than pleasant experience. It’s no secret that the real estate industry is practically unregulated and rife with malpractices. It has been a long time since the government has been talking about a real estate regulation bill that could bring some semblance of consumer protection to the decidedly anti-consumer practices of the real-estate industry.

However, this has remained a mirage, probably because the real estate business in India has traditionally enjoyed a very close working relationship with the politics business. If you google the phrase ‘india real estate regulatory bill’, you’ll come across a newspaper article from 2006 saying that a real estate regulatory bill was expected to be passed in the 2006 winter session of the parliament. You will also came across another article from 2008 that said that a real estate regulatory bill was expected to be passed in the 2008 winter session of the parliament. Not just that, you might also came across an actual draft of a model real estate regulatory bill dated September 2009, complete with a covering letter signed by a government official stating that the bill should be put up on the web by November 9, 2009 and comments invited from the public. It has been the better part of half a decade that a bill like this has been on the verge of passing. It’s entirely possible that the same fate awaits this bill too.

Still, last week saw at least one concrete step in getting this bill to become law when the Union Minister for Ministry of Housing and Urban Poverty Alleviation, Kumari Selja, released the Draft Real Estate Regulation Bill for public comments.

There are many good points about this draft bill, but there are also many that are less than optimal. Here’s an analysis of various issues. If you are seriously interested in the bill, you should also take out half an hour and read the document. You can download it from this link to the Ministry of Housing and Urban Property Alleviation http://goo.gl/yebYg. There’s a danger that the real estate industry will make organized representations while genuine public comments will be few. If you think a clean and well-regulated real estate sector is in your interest, then do read the draft of the bill, read this article and send your comments to the ministry at [email protected] (that’s right, the ministry uses a Yahoo address). We also invite you to let us at Value Research know what you are saying by putting a cc to [email protected] We will combine the best comments and publish them as an article on our website and our magazine.

Here’s an analysis of the draft real estate bill
Inadequate control on diversion of funds
Compared to the 2009 draft of the bill, the government has weakened the anti-fund-diversion provisions of the bill. This is a strange change. In the 2009 draft, all funds collected from the buyers would have to be kept in a separate bank account, from which money could be taken out only for direct use of the project. In the current bill, developers have to route only 70 per cent of the funds in this segregated bank account. This serves no purpose except to make it easier for developers to divert 30 per cent of the funds.
It must be noted that the anti-fund-diversion provisions of the bill are among the most important reforms that the Indian real estate sector needs. The biggest threat that anyone trying to buy an apartment faces are delays and even derailment of the project after they have paid the money and are paying an EMI to the bank. In almost all cases, the root cause is the diversion of funds by developers to launch other projects.
In fact, real estate insiders confess that many real estate promoters’ real focus is a cycle of funds that enable them to build huge land banks without having to pay for it. The payments received from each projects are primarily used to pay the advance on fresh land acquisitions on which newer project could be announced. This was a fabulous ponzi scheme while land prices kept going up. When the land bubble started getting punctured, the cycle broke and buyers suffered badly.

Establishment of a regulatory authority and an appellate tribunal
The bill allows for the establishment of a Real Estate Authority that will regulate the sector and enforce the provisions of this law. It also allows for the establishment of an appellate tribunal before whom appeals against the authority’s rulings can be made. This is the same structure as SEBI and the Securities Appelate Tribunal.

Mandatory registration and public disclosure
The new law will mandate that each project be registered and approved with the Real Estate Regulatory Authority and that all information filed with the authority be available on its website. No project can be announced or advertised before this registration. This alone will be a huge impediment to so many sharp practices. Basic facts about each project, like developer’s identity, land status, status of other regulatory permissions and project specifications will be kept in public access on the real estate regulator’s website.

Legally-binding definition of basic terms
The law lays down the precise meaning of the terminology of real estate. Terms like ‘carpet area’, developer, and promoter will have a exact definition. The law also defines what exactly common terms like advertisement, allottee, apartment, real estate agent will mean when used in the sale and purchase of apartments.

Exemption for developers of small projects, including phased projects
The law exempts projects on less than 4000 square meter areas from the necessity of registerion. In the original 2009 draft, the exemption applied only to projects on less than a 1000 square meters and with less than four dwelling units. The earlier exemption was clearly targeted at truly tiny projects like builder flats. However, 4000 square meters is not very small. The exact number depends on the local by-laws, it’s possible to build a project with over 200 small (600-800 sq ft) apartments on a plot of this size. It is not clear why these should be exempt from registration. Even more alarmingly, the draft act says that when a project is executed in phases, then each phase will be registered separately. This could be an easy loophole for developers to escape registration as even large projects could just be broken up into sub-4,000 meter phases for legal purposes.

Fixed Schedules and Takeover of Delayed Projects
All projects will be registered for three years. After this period is over, registration can be extended for up to two years. If a project does not get implemented in this period, then the projects’ registration is cancelled. The act has provisions for completing failed projects. It says that upon cancelling of registration, the authority can take action to ensure the project can be completed, including handing it over to the allottees. This is an interesting provision. Basically, it establishes that once allottees have paid up, they have a right to the project. If the developer fails to develop it, then he can be thrown out.

Short period for rectification of defects
The draft bill says that if an allottee brings a ‘major structural defect or deficiency’ to the promoter’s notice within one year of allotment, then that shall be repaired free of charge ‘within a reasonable period’. This is a shockingly anti-consumer provision. We live in a time when even cars and electronic goods come with guarantee periods of three to five years, and those are goods that have an expected life-span of only a few years. A building is something that is expected to last for decades. Moreover, the language of the law is so vague that a developer could easily define ‘major’ or ‘reasonable’ to his convenience.
Ideally, the fittings and finish should have a warranty period of one to two years and the structure itself should have a warranty period of a decade. This is more in keeping with the value and the expected life of the two.

No succor for older projects
Another big problem is that that the law completely ignores the malpractices of the past. Regulatory laws typically have mechanisms for bringing older businesses into their fold. Given the sad history of real estate operations in India, it’s untenable that all projects launched before this becomes the law will apparently stay unmonitored by it. There are lakhs of Indians who have their hard-earned money stuck in older mis-managed projects. It is unconscionable for the government to bring in a law and completely ignore the hardships of these people. Moreover, a strong new law will create a last minute rush for launching projects before the new law comes into force. We saw egregious examples of this when the Insurance Regulatory Development Authority (IRDA) tightened norms for ULIPsin 2010.

The law should have special provision for imposing time limits and delivery deadlines on older projects, or allow for a takeover by allottees. It should also have provisions for ensuring that for projects that are already under way, the flow of money should henceforth be through an isolated bank account. Similarly, the provisions of transparency of regulatory permissions and similar clauses can easily be applied to running projects.
Just a good starting point.
As the analysis above shows, this law is a good starting point, but no more than that. On many crucial issues, it falls short of protecting house-buyers’ interests. Worse, on some crucial issues, it has retreated sharply from the provisions in the 2009 draft. This shows the power of real estate lobbies at work. There’s no doubt that these lobbies will be hard at work during the public comments period as well. In your own interest, you should make sure that the consumer’s voice is also heard, and not just that of the developers and the promoters.