The Big Story: Falling houses
The real estate sector in the country has clearly undergone a phase of crisis, with large companies that got into colossal housing projects unable to complete them and now either facing legal action in courts or pushing for insolvency proceedings.
One such high-profile case is that of Unitech, claimed to be the largest real estate builder in the country. Last week, the Ministry of Corporate Affairs moved decisively to take over the management of the company, alleging mismanagement and diversion of funds. The Centre moved a petition in the National Company Law Tribunal, which allowed the Centre to go ahead with the takeover.
But this process was abruptly put to a halt on Wednesday, when the Supreme Court stayed the tribunal’s order. The Unitech case has been pending before the apex court for a while, which has denied bail to its executives as the company failed to make necessary deposits to payback its consumers as mandated by the court. How could the tribunal allow a takeover when the Supreme Court is seized of the matter? This was Chief Justice of India Dipak Misra’s poser to the Centre on Wednesday, following which a bench led by him stayed the takeover. Attorney General KK Venugopal also agreed that the tribunal should not have passed such an order as permission from the apex court was not sought by the Centre before moving the NCLT.
The Unitech case is symptomatic of a larger disease plaguing the real estate sector. Promoters went ahead with large projects despite signs of a slump in demand. This meant many projects had less than 50% sale, making the overall construction impossible as there wasn’t enough money to complete it. Home buyers who did subscribe to these projects were left in the lurch and faced a double whammy: they did not get possession of their homes while the banks continued to extract interest for their loans. As more and more cases of this nature began to reach the courts, pressure started mounting on the government. It is important to note that the section affected by such failed projects is the middle class, which makes the entire problem politically sensitive for the establishment.
The question, however, is if government takeover of the firms is the real answer for the rot that has set in. There is no dispute over the seriousness of the problem, with thousands of ordinary people severely affected due to the greed of the promoters. But this is symptomatic of a regulatory breakdown that led the sector to the current situation. Till last year when the Real Estate Regulatory Authority Act was passed, there were gaping holes in the regulatory mechanism that left consumers at the mercy of promoters. Projects were approved by state government authorities indiscriminately and complaints of corruption in approvals have been too many to count.
The RERA Act was supposed to put an end to such troubles as the law was presented as a consumer-centric regulation where even ongoing projects are supposed to be registered. The law wanted to ensure that there was no diversion of funds meant for one project to another.
However, despite its implementation on May 1, 2017, only 13 states have notified the rules under the law. Media reports suggest only three states have formed a housing regulator as mandated by the law. Only one state – Maharashtra – has launched the RERA online platform, which seeks to make projects more transparent.
Instead of pushing for better implementation of the RERA Act, the Centre has taken the drastic step of taking over the management of a large real estate company facing severe financial troubles and multiple litigation. This essentially means the government is now expanding its footprint in the real estate sector. The problem with such a move is that given the state of the real estate sector, the demand for government takeover of sick firms will only increase as consumer of other firms would want the same benefit Unitech customers got. In fact, other major firms like Jaypee and Amrapali are also facing similar troubles before the Supreme Court after their projects failed.
While the intention behind the government’s move is noble in the form of helping home buyers, the focus should remain on the heart of the problem: proper and effective regulation.
The Big Scroll
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