How The Real Estate Bill Will Transform The Sector
The Real Estate (Regulation and Development) Bill, 2015, has been the subject of heated debates in real estate circles. It is expected to protect not only the interests of consumers but also those of developers.
At present, the absence of a regulatory framework, lack of transparency and delays in obtaining numerous approvals are some of the issues hurting the sector. These need to be addressed to calm investors' nerves and boost sentiment. Therefore, among the key focus areas of the Bill are encouraging best practices in the sector, bringing transparency and accountability, and ensuring timely execution of projects.
Amid high expectations from the Bill, MakaanIQ looks at some of the most important features that the legislation proposes.
A regulatory authority
The demand for a dedicated expert body to cater to the specific disputes in the sector has been a long-pending one. For other sectors we have various regulators and for a, such as consumer fora, the insurance ombudsman, banking ombudsman, the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, etc, but the real estate sector is yet to get such a dedicated body. Real estate disputes, therefore, ultimately lead to litigation. This not only delays things but many a time even the judges find themselves unable to adjudicate such matters for want of requisite domain knowledge.
State-level regulatory authorities have been proposed to be set up. Also, the real estate appellate tribunals proposed to be established are to have the powers to regulate their own procedure. These tribunals will remove the jurisdiction of regular civil courts to adjudicate real estate disputes. This move will facilitate fast-tracking of dispute resolution.
Registration of projects & agents
A developer falling under the ambit of this law but still failing to register his property will be liable to pay up to 10 per cent of the project cost as penalty. Registration and various other details available on the portal will make decision-making easier for buyers. The list of erring or defaulting developers and agents can be uploaded on to the portal to caution buyers.
The Bill also calls for mandatory disclosure of registered projects with the essential requirements. Plan layout, project details, land status, promoter credentials, details pertaining to contractors, architects, agents, structure engineer, etc, are required to be mentioned with the authority. This will help buyers and financial institutions better judge the viability of a project and accordingly decide whether or not to invest in it. Many rating agencies may also start appraising projects and developers, thereby helping buyers in making informed choices.
Cap on manipulation of funds
Developers are often accused of using the funds raised for one project in another project. This has a spiralling effect and developers sometimes speculate with the consumer's money, ultimately causing loss to buyers. The developer should ideally use the money raised for a particular project in that project, not elsewhere. The Bill seeks to address this problem effectively by making it compulsory for developers to deposit half the funds raised from consumers in an escrow account with a scheduled bank. The amount will have to be deposited within 15 days and could be used only towards construction of the project.
Parity in interest rates
At present, it is often seen that if a buyer delays payment, interest at an exorbitant rate is imposed on him. If, on the other hand, there is a delay in possession or payment by the developer, he is able to get away by paying nominal interest. For example, buyers generally have to pay the delayed amount along with more than 18 per cent interest, while the rate of interest imposed on builders is as low as four per cent. So, the Bill also proposes to do away with this disparity and make a uniform rate applicable on both the builder and the buyer.
Enhanced scope and applicability
Projects above the minimum plot size of 500 square metres are to come under the ambit of the proposed Bill, which covers both residential and commercial projects. Most projects being undertaken will come under the scanner. It is, however, seen as reasonable that small projects (those of less than 500 sq mt) should not be required to comply with all formalities, as that might increase their compliance cost and ultimately inflate the cost of housing units.
The definition of the real estate agent has also been made wide enough to ensure unscrupulous elements do not find an exit route. The definition will now also cover the person who introduces a prospective buyer to a seller.
Though there sometimes have been issues of real estate developers duping consumers, we seldom see any jail term being handed to a developer for such malpractices. The Bill proposes a jail term of up to three years or penalty or both for errant builders. Besides, other parties like agents, buyers, etc, might also face a jail term of a year if they do not comply with the orders of the tribunal. Freezing of bank accounts, revocation of project registration and grant of rights of further development to a third party are some other proposed penalties.
No change without buyer consent
Buyers sometimes find that they were sold the idea of something and then delivered something entirely different. Developers start booking even before getting the requisite approvals – and sometimes they even fail to get the approvals. The bookings are made on the basis of their proposed plans, which tend to get changed over time. Many a time, the entire plan gets changed without the buyer getting to know any of it – instead of the initial plan of a 10-floor building, the builder might go on to construct 40 floors, the amenities might be scaled down, and so on. The buyer finds himself at loss in such a situation. Now, the Bill has proposed that a developer cannot change either the plan or the design of a project without taking consent from buyers.
Cap on advances without written pact
Some developers earlier got advances from various sources without any written agreement. Now, a bar on this has been proposed to be imposed; developed will be restricted from accepting an advance in excess of 10 per cent without entering into a formal written agreement. This is good for buyers but will compel developers to scout for alternative funding sources to finance their projects in the initial stage. That might inflate the cost of housing units.
What the Bill has not covered yet?
- The most important demand from developers has been for a 'single-window clearance mechanism'. This bottleneck remains unaddressed and the developer will still be required to approach multiple authorities for obtaining approvals.
- The fear of over-regulation is already haunting developers. The registration and other related provisions will bring transparency but it might also become cumbersome and lead to excessive bureaucratic interference.
- The rules pertaining to the level of disclosures required have yet to be framed. Some ambiguities on these remain. Is the developer required to provide details of the project and his company, and those of the personal nature? What about projects being executed through special-purpose vehicles.
- The mandatory requirement of depositing 50 per cent funds in an escrow account is seen as excessive. The Bill mandates that only 50 per cent of the amount collected from buyers can be used for construction. But in many cases the cost of land could be more than 50 per cent. The developer will be in a fix in such circumstances; more so when he is strapped for cash. An escrow account, unlike other instruments, generally does not even earn any interest on the deposited amount.
The Bill, coming with task of addressing the needs of all stakeholders – buyers in particular – is expected to streamline the real estate sector. However, what remains to be seen is how well it is implemented. The central and state governments will need to put in place a proper machinery; the main expectation, though, will be from developers. Speculators, fly-by-night operators and developers indulging in malpractices will no longer be able to stay in the industry.
The Bill was introduced in the Rajya Sabha in 2013. With both the Opposition Congress party and the ruling National Democratic Alliance trying to push it, the Bill is likely to be passed soon. The Bill is expected to prove an important pillar in the government's mission of 'Housing for All by 2022'.