On December 9, 2015, the union cabinet led by Prime Minister Narendra Modi approved the Real Estate (Regulation and Development) Bill, 2015, as reported by the Select Committee of Rajya Sabha.
In May earlier this year, the bill had been sent to a Select Committee of the Rajya Sabha. The union cabinet has accepted all the suggestions made by the Select Committee. The Bill will now be put up before both the houses of Parliament.
So what does the Bill have to offer? The real estate market in India is an excellent example of information asymmetry where one side has much more information than the other. In this case, the real estate promoters and the real estate agents have much more information than the home-buyers. Even getting something as basic as the going price of an apartment in a given area is very difficult.
The Rajya Sabha Select Committee on the Bill met real estate consumers and this is what it had to say in its report: “These consumers were unanimous in their submission that they have no means to know about the real status of the project for example whether all the approvals have been obtained, who is holding the title of the land, what is the financing pattern of the project and what has been the past record of the builder etc.? As a result, they invested their money without having any information about the project. In many cases, they were not given what was promised to them and in almost all cases the project was delayed.”
The Bill seeks to tackle this information asymmetry and the fact that the real estate sector does not have any single regulator regulating it. The Bill talks about setting up of a real estate regulator (Real Estate Regulatory Authority to be very precise) in every state and union territory. A real estate promoter needs to register a project with the real estate regulator before he starts selling or advertising it.
Projects with the area of land proposed to be developed exceeding five hundred square metres or where more than eight apartments are to be developed, need to be registered with the real estate regulator of the state they are based in.
The application to the regulator needs to be accompanied with details like the real estate projects already launched by the real estate promoter in the past five years. It also needs to be mentioned whether these projects have been completed or are still under development. If the projects has been delayed, the reasons for the delay need to be mentioned.
Over and above this an authenticated copy of the approvals and commencement certificate from the competent authority also needs to be submitted. Other important details like land title, the layout plan for the proposed project, the location details of the project, also need to be submitted to the regulator.
After an approval is granted by the real estate regulator, the real estate promoter will have to upload all these details on to the website of the real estate regulator. Any advertisement of the project should have the precise link to the project details as well.
At the time of booking and issuing an allotment letter to the buyer, the promoter needs to make available to the buyer, the time schedule of completion of the project, including the provisions for civic infrastructure like water, sanitation and electricity.
Many real estate companies over the years have sold homes without the basic amenities in place. In some cases, housing societies have even lacked a water connection and have needed to get water delivered through water tankers almost on a daily basis for years. The Real Estate Bill hopes to correct this. It also hopes to correct the information asymmetry that prevails in the sector up until now.
The Bill also allows any real estate buyer to file a complaint against the real estate promoter or real estate agent with the real estate regulator in case any violation of the provisions of the Bill as and when it becomes an Act.
A major problem with the sector has been a delay in the delivery of homes. One of the major reasons this happens is because real estate companies announce a new project, raise money and then use that money either to complete an earlier project or pay off debt.
This has led to a situation where many projects have been delayed endlessly given that the trick of starting a new project and raising money doesn’t seem to be working anymore. The Bill seeks to correct this situation. The real estate promoter needs to maintain 50% or “such higher percent, as notified by the appropriate government” of the amount raised from the buyers of homes, in a separate bank account.
This money can be only used for the cost of construction and can be withdrawn by the real estate promoter in proportion to the percentage of completion of the project. This is one of the major clauses in the Bill and if implemented correctly can bring huge relief for the buyers.
This clause has been diluted. In the original version of the Bill, the promoter needed to maintain 70% of the amount raised in a separate bank account. The reason offered for this dilution is that in many cases land prices form a major part of the project and maintaining 70% of the money raised in a separate bank account isn’t the best way forward.
Further, up until now the buyer while buying a home had no clue about what exactly was the area that he was paying for. The Bill defines the term carpet area exactly as: ““carpet area” means the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.” Again, if implemented well this clause can bring huge relief to home buyers.
Real estate agents will also need to register with the regulator. This is another good move where not anyone and everyone will jump into become a real estate agent or a broker, as is the case currently.
Also, currently the real estate promoters keep changing the plans as they keep building the project. Once the Bill becomes an Act, this may no longer be possible. Any alterations to sanctioned plans, layout plans and specifications of the buildings or the common areas within the project will need written consent of at least two-thirds of the buyers other than the promoter, who have bought apartments in the building.
This is another buyer friendly measure. On a jovial note what this means is that real estate promoters will have to stop advertising all those swimming pools which are planned at the time a project is launched but never get built.
Up until now buyers have had to pay a huge rate of interest every time they miss a payment to the real estate promoter. But the promoters never pay or at least don’t pay the same high rate of interest, if there is any delay on their part. The Bill essentially calls for the same rate of interest to be paid by the real estate promoter as well as the buyer in the eventuality of a default on either side.
Further, if the promoter violates any one of the provisions under section 3 of the Bill he shall be punishable with imprisonment for a term which may extend up to three years or a fine which may extend up to a further 10% of the estimated cost of the project, or with both. Section 3 of the Bill basically deals with the real estate promoter having to register with the real estate regulator before launching a project and then following a series of buyer-friendly steps.
On paper, the Bill seems to be well thought out and takes care of the all the issues that buyers have had with real estate promoters in the years gone by.
Nevertheless, the implementation of the Bill as and when it becomes and Act, will be carried out at the state government level. And whether state governments carry out the implementation in true letter and spirit remains to be seen. I have a few reservations regarding the implementation of the Bill when it becomes an Act, which I shall discuss in a column next week.
Postscript: The Rajya Sabha website has uploaded the Select Committee’s recommendations as well as the Real Estate Bill in a scanned format instead of uploading the proper report.
If Digital India is the way forward this is clearly not done. Information needs to be made available to everyone in the most accessible way. Hope the concerned authorities are listening.
The column originally appeared on The Daily Reckoning on December 11, 2015