states diluting RERA

Fairy tales have happy endings.

The Real Estate (Regulation and Development) Act, 2016, or RERA for short, which came into effect from May 1, 2017, was supposed to be a fairy tale.

A fairy tale that would end all the trouble that homebuyers have while buying a house.

It would be put the big bad builders in their proper place.

But RERA is turning out to be like a bad art movie from the 1980s, where the system would inevitably crush the spirit of the hero, and win. (If you want to precisely know what I mean here try watching a movie called Paar).

This is what seems to be happening with RERA. Allow me to explain.

RERA is a central Act. But land is a state subject. Any real estate project needs land. Given this, state governments have the right to frame the operational rules for RERA.

And this has given them an opportunity to dilute the key provisions of RERA. This they have done with full impunity.

Before we get into the details, let’s try and understand why an Act like RERA was required in the first place.

Let’s say you want to buy a product. Let it be any product. It could be something as simple as an eraser for your child (I wonder if children still use erasers) or something a little more complicated like an air conditioner.

What do you do when you want to buy an eraser? You head to the local stationery shop, you pay the price of the eraser and you get the eraser.

What do you do when you want to buy an air conditioner? You head to a shop selling whitegoods and choose the air conditioner you want, given your budget, brand preferences, the preferences of your family and the space you have to install it.

The retailer doesn’t hand over the air conditioner to you immediately, like is the case with the eraser. (And that would be stupid given that how would you carry the air conditioner back to your house). So, the next day, the retailer delivers the AC at your house. In a few hours, a couple of people come and install it. And we are done.

What is the point I am trying to make here? When you buy a particular product from the market that is exactly what you get. I mean there is no chance of your buying an air conditioner of one and a half tonnes and the retailer delivering a one tonne air conditioner.

In the odd case that this happens, it is bound to be some mistake at the retailer’s end and will be soon corrected.

Along the same lines, when you buy an eraser, the stationery shop doesn’t insist on selling you a pencil sharpener or a ball pen for that matter.

At the cost of repeating, you get what you want and what you have paid for and not something else.

But when it comes to buying a home in India things don’t work in the same way.

Imagine you paid for a three-bedroom hall kitchen in a society which is supposed to have a swimming pool, a club house, a lot of greenery and what not.

The way things work in India, your chances of getting what has been advertised and what has been paid for, are very low.

In fact, in many cases, the size of the apartment gets smaller. In many cases, the number of floors goes up. In the original plan the number of floors planned were ten. By the time, the building gets built, it has fifteen floors.

And in such cases, no is bothered about the fact that the foundation was originally dug for ten floors and now 15 floors have been built on it.

In some cases, the builder does not deliver on time. This leads to the homebuyer who had bought the home with the idea of living in it, having to continue paying a rent and at the same time paying the EMI on the home loan that has funded the home.

In some cases, the builder simply takes money from the buyers and disappears.

Considering all these points, a homebuyer in India considers himself lucky if he gets a home at the end of the promised period, at all.

So what if it’s slightly smaller. So what if it doesn’t have the facilities that it was originally supposed to have. So what if the drawing room gets seepage after the first rains.

An Indian homebuyer can adjust with all this and more.

The RERA was supposed to help the homebuyer on such fronts. It essentially has four key provisions:

a) 70 per cent of the money collected for a home project by the builder is supposed to be held in a separate bank account. Further, the money can be used only for the project and can be withdrawn according to what proportion of the project has been completed. This has been done to ensure that the builder spends a bulk of the money for the project he has raised money for and not spend it on other things, as builders are wont to do.

b) RERA recommends a fine for the builder which can extend up to 10 per cent of the cost of the project and/or a prison of up to three years, if the provisions of the Act are not followed.

c) The builder needs to treat any structural defects in the project arising within five years of him handing over possession to the buyer, free of charge.

d) RERA includes ongoing projects within the Act as well, by defining an ongoing project as a project “for which the completion certificate has not been issued” on the date of commencement of the Act. This provision was put in to ensure that many projects which have been endlessly delayed over the years, come under the Act. And in the process the Act offers help to the harried buyers.

All these provisions have been diluted by the state governments in the operational guidelines of RERA that have been notified. Take a look at Table 1.

Table 1:

Source: Crisil ResearchThe conclusion that one can draw from Table 1 is that if you want to fully benefit from RERA you need to be a homebuyer in a union territory.

The interesting thing is that around two-thirds of the states still haven’t notified the operational guidelines of RERA as yet. This tells us how serious state governments are about implementing RERA.

To conclude, RERA hits at the heart of the basic problem with state level politics in India. The state level politics thrives on the nexus between builders and politicians. In some states builders are politicians and politicians are builders. It is difficult to differentiate between the two.

The trouble is that against whom the rules are being made are also the ones deciding on the rules. Hence, it is not surprising that the rules have been diluted or they lack clarity in comparison to the RERA Act of the central government.

But this is real life. And real life is not a fairy tale.

The column originally appeared on Equitymaster on May 4, 2017