It has been a little over a year since Parliament passed the Real Estate (Regulation and Development) Act – giving the sector its first regulator with an aim to usher in transparency and fair practices to protect the interests of home buyers and to penalise errant builders – but many problem areas are still unaddressed and the benefits of the regulation remain on paper. However, hope continues to float in the housing industry that the law will eventually be implemented in its full spirit.
Brief history of regulation
While land is part of the concurrent list (that is, both the Central and state governments can pass laws), lack of regulation and various other problems have for long besieged the real estate sector. As the Ministry of Housing and Urban Poverty Alleviation states in its FAQ on the Real Estate (Regulation and Development) Act:
“The real estate sector has grown in recent years but has largely been unregulated from the perspective of consumer protection. Though consumer protection laws are available, the recourse available therein are only curative, but not preventive. This has affected the overall potential growth of the sector due to absence of professionalism and standardisation.”
In contrast, regulation has served other sectors well. The Securities and Exchange Board of India is the stock market watchdog and was given more teeth after the Rs 5,000-crore Harshad Mehta scam in 1992, in which the stockbroker is alleged to have swindled several banks and duped investors by artificially pumping up stock prices. The Telecom Regulatory Authority of India and the Insurance Development Regulatory Authority were both formed as the telecom and insurance sectors were opened up for investment from private players, including foreign investors.
Source of black money
Real estate assumes greater importance because of its role in black money. Cash generated from tax-evading transactions are usually parked in gold and real estate. A 2012 report by the National Institute of Public Finance and Policy estimated the generation of black money in the transfer of real estate properties to be Rs 5.7 lakh crores.
A 2010 study of the Ministry of Finance, A white paper on black money, dedicated a section to real estate where it stated, “The real estate sector in India constitutes about 11% of the GDP [gross domestic product or the final value of goods and services produced in the country in a year]. Investment in property is a common means of parking unaccounted money and a large number of transactions in real estate are not reported or are under-reported.”
The real estate sector is highly opaque since there are no rules on disclosures for builders. Builders run full-page advertisements in newspapers to attract interest in their projects but there is no way for consumers to check if their claims are valid. In comparison, when a company wants to raise money from the public for an initial public offering, it has to file a detailed prospectus with the Securities and Exchange Board of India, which is available on the regulator’s website for download.
No wonder then that the objects and reasons for the Real Estate (Regulation and Development) Act include the following, as stated by the Ministry of Housing and Urban Poverty Alleviation:
- Ensure accountability towards allottees and protect their interest.
- Infuse transparency, ensure fair play and reduce frauds and delays.
- Introduce professionalism and pan-India standardisation.
- Establish symmetry of information between the promoter and allottee.
The Real Estate (Regulation and Development) Act has some significant provisions for the sector. Some of these include:
- A State Real Estate Regulatory Authority that will regulate transactions in both the commercial and residential real estate sectors.
- Strict disclosure norms for real estate developers, including on critical areas such as project approvals, land title, and schedule of completion.
- Moving to carpet area (the net usable area in a flat measured wall to wall) as the basis of measuring a house instead of the ambiguous and abused concept of built-up area (carpet area plus the thickness of the walls and ducts).
- Penal rate of interest on the builder for project delays.
- Compulsory registration of projects exceeding a predefined size with the regulatory authority.
The law thus seeks to bring the unorganised real estate sector within the ambit of formal regulation. These regulations should benefit reputed builders who are already complying with various state laws and staking their reputation on the timely delivery and high quality of their products. Unscrupulous real estate developers who were taking advantage of the lack of regulation would lose out if the Act is implemented in its full spirit.
Between cup and lip
Unfortunately, the Real Estate (Regulation and Development) Act is still far from being implemented in full. Not many state governments have brought in their versions of the legislation. In a research note, credit rating major CRISIL stated that only nine states and six Union territories have notified their versions of the law. And those that have done so have diluted original provisions in various areas, such as the definition of ongoing projects and penalties for non-compliance. Also, none of the states have established a permanent regulatory authority while 13 states and Union territories had created interim regulatory authorities till May 1 – exactly a year since the law came into force.
Thus, while it has been a year since the Real Estate (Regulation and Development) Act was approved by Parliament, it will still be some time before consumers see the real benefits it offers. For the real estate sector, however, this delay might only be a temporary reprieve. They will eventually have to fall in line with the regulations. Ultimately though, a lot will depend on the state governments as well as the Central government to demonstrate their seriousness in regulating a sector – housing – that represents a basic need of every citizen of India.
Anupam Gupta is a chartered accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50.