DELHI: Two years after the Union housing ministry came out with a draft bill to regulate the real estate sector, the final bill is ready to be introduced in Parliament during the upcoming Monsoon Session. The keenly-awaited bill, which promises a transparent regime that would uphold the interest of the home buyer, is being seen as a game-changer in a largely unregulated sector, even though some of its provisions have come for some flak from the real estate industry. As housing minister Ajay Maken told The Indian Express, “Not all may agree with our methods, but very few disagree that the home buyer is being given a raw deal.”
Several provisions of the draft bill have been reworked after consultations with states in the Real Estate (Regulation and Development) Bill, 2013, a copy of which was accessed by this newspaper. Analysts have welcomed the move as a necessary pre-condition to professionalising the sector. “Apart from protecting buyers’ interest and bringing in credibility to the developer community, we also see this working positively in terms of attracting investments in the Indian real estate sector,” says Sanjay Dutt, executive MD, South Asia, Cushman & Wakefield.
REGULATOR FOR EACH STATE:
The primary objective of the bill is to form a Real Estate Regulatory Authority in each state to be established by government of the state or union territory. An exception is Delhi, where the regulator would be set up by the union urban development ministry. In its draft version, the bill had envisaged two authorities: oneat the state level and the other at the central level. That has been done away with in the final copy. The bill further provides for a common regulatory authority for two states or union territories and also more than one authority within a state. This would make the work load of the regulator more manageable in large states, even as that option rests with the state government.
CARPET AREA THE ONLY BASIS
The bill very clearly defines “carpet area” as the basis that would govern the transaction in any real estate project. It also defines “common areas” as distinct from carpet area. “Standardisation of terminology used in realty transactions usually led to confusion. Introduction of standard definitions will certainly provide ease of understanding. The absence of terminologies such as ‘built-up and ‘super built-up’ will discourage unfair trade practices,” says Bhairav Dalal, associate director, PwC India.
In addition to private sector players, the bill has also brought within its ambit government agencies that promote housing by defining them under the rubric of promoters. Interestingly, there are several cases where the Central Government Employees Welfare Housing Organisation (CGEWHO), an agency under the housing ministry, has been dragged to consumer forums for deficiency in service.
The definition of promoters has been expanded to include buyers/companies who purchase in bulk with an aim to resell later. In some markets, real estate developers rely on channel partners to generate sales, who usually operate under this model. The regulation would cover these entities too. The bill also mandates regulationfor all real estate agents, primarily to check the black money trail and also with an intent to ensure professional services to the buyer.
“We welcome the clause proposed for real estate agents to register themselves with the regulator. Home buyers at times tend to get misguided by advertisements put up by developers. As real estate agents it is our responsibility to represent true facts and details for any kind of property transaction or information required by home buyers to make a decision,” says Honey Katiyal, CEO, Investors Clinic, a broker with a pan-India presence and operations in Dubai and Singapore.
The minimum plot area that would be governed by regulation has been fixed at 1,000 sq metres and the maximum number of apartments at 12. In its draft avatar, the area was 4,000 sq metres. This would be inclusive of all phases of a development, so developers cannot browbeat the system to escape regulation.
The bill, however, does not mention whether projects prior to enactment would fall within the regulatory regime, although it says that no registration would be required if the builder has got all approvals prior to the commencement of the Act. It also does not cover redevelopment or renovations in cases where the allottees are the same and the project is not marketed as a new one.
With these exceptions, the bill fulfils a long-standing need for transparency by making a developer mandatorily register a project. Once the registration is given, the developer would be given a login and apassword on the website of the regulator where the mandatory disclosures have to be made. Some of them are: a commencement certificate to start construction, declaration of clear land title, all approvals, layout plans and development works (external and internal), the pro-forma agreement with the buyer, names of agents, time frame for completion.
The authority is mandated to complete the registration process within 15 days, and if the case may arise, give reasons why registration cannot be granted. If there is no word from the authority within this period, the registration would be deemed to be given. This stipulation would ensure the regulator cannot sit on any application indefinitely. The registration would be valid only for the duration of completion as stated by the builder. Earlier there was a window to extend it by up to two years, but the current bill has made that possible only subject to rules made by the authority. The regulator can also cancel registration subject to the rules.
AGREEMENT AND PAYMENTS
An important provision is for the developer to place 70 per cent of the sum collected from the buyer, or a proportion that the regulator may define, in an escrow account and to be used exclusively towards the construction cost for the project. In addition, the developer can accept a maximum of 10 per cent of the cost on booking from the buyer and only after entering into a sale agreement. Bookings can be cancelled only as per the terms of the agreement, and not unilaterally.
Thisprovision would ensure that developers do not divert funds from one project into another. “The bill will require the developers to invest their own capital and launch only those projects that are well funded and have time-bound construction plans in place. This is a quantum shift which may take time to settle in as a process,” says Dutt.
Developers have reservations on the escrow provision being set at such a high percentage. Lalit Kumar Jain, chairman, Confederation of Real Estate Developers Association of India (Credai) says, “Construction costs vary in different markets. For instance, in prime areas, the cost may be around 30 per cent whereas in suburban areas it could be as high as 80 per cent of the entire cost element. The provision should be based on the ratio of the extent of the construction cost so as to ensure timely completion and prevent fund diversion.”
Buyers, who have usually to depend on assurances from the developer on project completion can now see the status of the project on the regulator’s website as developers would have to post quarterly updates on the construction progress and also the number of bookings done.
If the developer is unable to deliver the project as promised, the authority can compensate the buyers by refunding the money paid with interest. This is the verdict that most consumer forums have given in such a case.
Buyers too, have an obligation under this law to ensure timely payment of their share and cough up interest if they delay.“The Bill works both ways. While it aims to hold the developers accountable, it also looks to ensure that the allottees do not default in making payments. By providing penalties for both the promoters and the allottees, the Bill seeks to ensure that non-compliance is minimal,” says Anuj Puri, chairman and country head, Jones Lang LaSalle India.
The bill has provided for a robust grievance redressal mechanism with stiff penalties and in extreme cases, imprisonment of the developer. At the first level is the adjudicating officer of the real estate authority who would hear cases and fix penalties. At the second level is the appellate tribunal that would hear appeals on the adjudicating officer’s order. The officer and the tribunal have to decide a case within a specified period.
“Most aggrieved consumers abstain from the hassles of prolonged litigation for obvious reasons. They may now be encouraged to explore the window that will be available under the fast track dispute settlement mechanism,” says Dalal.
Much of the delivery on the goals envisaged in the bill, rests with the states as they would make the rules and administer them, and that would be the test of its efficacy. “The success of this law will be directly proportional to how proactive the real estate authority is. One hopes that it is able to identify the pointers well in advance. Only then will it be successful in achieving the goal of a “transparent realty” in India,” says Dalal.