Anti-corrupting Real Estate

For many, if not most people, buying residential property is the biggest investment they make in their lifetime. Last week, the government released for public comments a Draft Real Estate Regulation Bill, which is said to be on its way to becoming the law in the winter session of the parliament. As such, this is a step towards bringing some semblance of consumer protection to the decidedly anti-consumer practices of the real-estate industry.

However, this news did give me a strong feeling of déjà vu. When I googled the phrase ‘india real estate regulatory bill’, I came 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. I 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, I came also came across a draft of a model bill dated September 2009 with a covering letter from a government official attached. The letter said that the bill should be put up on the web by November 9, 2009 and comments invited from the public. So I wouldn’t keep my fingers crossed too hard.

Nonetheless, if and when this bill does become the law, it will be a huge improvement for the house-buyers in India. Many, if not most of the problems associated with buying a house at every step could be solved substantially. For example, right at the beginning of the process, buyers face the problem of getting trustable information about the identity of the promoter and the basic facts regarding the legal and approval status of the land and the project.

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. It also mandates that the developer stick to the announced specifications and plan and lays down penalties of they don’t. Currently, these things are just part of a one-sided agreement that developers typically present to buyers as a fait accompli.

Around the country, buyers’ biggest troubles arise from long delays and from developers transferring money from one project to another. The new law tackles this. Registration of a project is for three years and is then extendable for specific reasons twice for one year each. After that, the law allows for what spears to be a handover of the project by to some other entity like an association of the buyers.

As far as fund diversion is concerned, the draft law is less than satisfactory. It mandates that 70 per cent of the funds taken from buyers be kept in a separate audited account and paid out only for project expenditure. This is strange, because the 2009 model law said that 100 per cent of the funds should be thus isolated. Realistically, this means that the old draft said that the developer should not be able to divert any of buyers’ funds but the new draft says that it’s OK to divert 30 per cent. This is a suspicious change and the government should clarify the logic behind it.

The other huge problem is that that the law completely ignores the malpractices of the past. Financial 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.