Last week, there were a number of news items in various media that celebrated the fact that regulatory reforms were at last coming to the real estate sector. Readers would have learnt from these stories that the government was planning to bring in the Real Estate Regulation Bill to parliament during the budget session. This is great news. It was also great news when the government had expressed its intention of bringing this bill to parliament during the winter session of 2011. And in the winter session of 2009. And that of 2008. And also of 2006. That was about six years ago, by the way. If I had more patience in my digging into Google search results, then it may actually turn out that this Bill would soon qualify to be stored in the National Archives.
You see, the Government of India's Real Estate Regulation Bill is now like one of those migratory birds that visit bird sanctuaries every winter. Sometimes it misses a year or two, but generally it puts up an annual appearance. Every time, a handful of journalists write articles pointing out that the woes of house buyers are about to be over, the usual suspects from the realty industry's associations spout sound-bites that lament the great hardship that will befall them if the bill is passed and then its all forgotten till next year.
Of course its entirely possible that this year will be different from the last six and the bill will actually become law, but don't keep your fingers crossed. Meanwhile, the realty industry has succeeded in ensuring that the bill has become softer on some of the abuses that it subjects its customers to. This becomes clear if one compares the 2009 draft of the bill (which the government had made public at the time) with the 2011 draft.
Here are a couple of examples. Compared to the 2009, the government has weakened the anti-fund-diversion provisions of the bill. 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 2011 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.
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.
Another curious change has been make it easier for developers to escape the provisions of the bill altogether. In the 2009 draft, very small projects that were less than a 1000 square meters and had with less than four dwelling units were exempt. This was later increased to 4000 square meters with no limit to the number of units. Even more alarmingly, the act says that when a project is executed in phases, then each phase will be considered separately. This means that even very large projects could just be broken up into sub-4000 meters phases and escape much of the regulatory oversight of the bill and the regulator.
It's no secret that when it comes to the real estate industry, governments at all levels, from the center to local authorities, are extremely reluctant to bring in any meaningful regulations. For reasons that are anybody's guess, this is a privileged industry, regulated with a lighter hand than ones sees anywhere else. The fate of the real estate bill just strengthens this notion. This is unfortunate because for most Indians, their house is likely to be the biggest investment they ever make.