The Union Cabinet of India, after a long hiatus, finally cleared the Real Estate (Regulatory & Development) Bill on 4 June 2013. The bill aims to instil transparency into a sector that has been so far unregulated and has witnessed haphazard growth. Although in its current form the bill only covers new projects of 4,000 sqm or more in the residential sector, consumers can now expect some of the best practices of this industry to come into force, including protecting their interests against developer malpractices, such as timeliness of project completion, delay in accountability and dispute resolution. Once the bill comes into force, there will be a standard definition of related terminology throughout the country. The bill proposes a regulator in each state and union territory. In addition, it talks about a tribunal to speed up the dispute resolution process. However, before becoming an act, the bill has to clear both houses of the Parliament of India in the upcoming monsoon season.
A major concern for developers is securing capital, as they will not be able to use funds received from one project as capital for another project, as the “70% or lower” clause mandates the amount to be kept in a separate bank account to be used for the said project only. Developers would become more dependent on costlier bank and Non-Banking Financial Company (NBFC) lending for project funding, as they cannot launch a project until all approvals have been received from the relevant authorities. However, this clause has been diluted from its earlier form of depositing 70% into an escrow account.
Developers will need to streamline operations to meet some clauses, particularly over the timely delivery of projects. With this measure encouraging timely completions, the bill is likely to lure investors and end-users with greater faith that the developer will deliver the property to the promised specification. In addition, misleading project advertisements may result in punitive action by the state. The clause regarding criminal prosecution may deter some of the smaller developers who are somewhat unprofessional from launching new projects with the promise of speed and precautions. As a result, this bill could help inculcate the developer community with a professional attitude.
The bill may help to reduce money laundering through real estate by keeping a trace of the money trail through organised brokerage, as it will be compulsory for real estate agents to have a licence. Banks and financial institutions will now become more confident in lending money to this sector due to the lower risk of misuse of funds. It might help the real estate industry towards a paradigm shift in terms of transparency and consumer friendliness, increasing India’s transparency score, and it could usher in a more mature Indian real estate market, helping everyone related to it in the long term. However, the possibility of an increase in project cost on the back of transparency measures without a single-window clearance and the absence of focus in attracting FDI might act as subduing parameters going forward.
About the author
Sujash Bera is the Assistant Manager, Research for Jones Lang LaSalle in India, based in Kolkata.