'Bill likely to create an initial shake out in the industry'

The much-awaited Real Estate (Regulation & Development) Bill was cleared by the Cabinet in its meeting on December 9, 2015, on the basis of the report of the select committee of the Rajya Sabha. While it still needs to get passed by Parliament, it seems like a matter of time before it becomes a law.

Before analysing the provisions of the Bill, one must realise that it is an evolving law which will get refined with experience over time, but has the potential to transform the sector just like the SEBI, which as a regulator has not only brought about transparency and order into the way capital markets operate, but has improved volumes vastly and brought down transaction costs significantly. The major changes introduced by the current Bill over the one presented in 2013 are: To make the law applicable to asset classes other than residential, which includes commercial offices, godowns, retail spaces, etc. The inclusion of projects as small as those built on land of 500 sq.m. with eight units to sell.

The timelines for dispute resolution by the RERA (Real Estate Regulatory Authority ) as well, and appellate tribunal have been significantly reduced and the Bill now also allows buyers to approach the existing consumer courts for redressal apart from the RERA. A new provision for imprisonment for violation of orders of the appellate tribunals and / or non-payment of monetary penalties has been included.

Formation of welfare association / society and conveyance of appurtenant land and common amenities has been made time bound. The structural defect liability has been extended to five years, instead of two years. The rate of interest to be paid by developers for delays or default is now same as to be paid by buyers for delays. Promoters are also required to give historical records of project completion, delays, details of pending cases — giving the buyers an opportunity to take an informed call. Another aspect which was earlier left unaddressed was the promoters’ ability to change plans — in the current form they can change plans with the consent of two-thirds of the purchasers — this provides rooms to promoters without any distress to the buyers.

The removal of bulk purchasers in the definition of promoters seems to be a welcome change as it was an onerous provision to extend the liabilities of the promoter even to investors, it would have further resulted in reduced investor appetite in an already liquidity starved industry.

The process of deposit and use of amounts to the specified account have been outlined more clearly. Keeping a minimum deposit criterion, States have been given the discretion to decide the exact percentage of such deposit, since the construction cost as percentage of sale value will differ and a standard percentage will not be a fair stance.

A large allocation towards such specified account will impact the further land acquisition by developers due to limited availability of surplus funds. The act could consider providing a mechanism to withdraw from the specified account for purposes other than construction as and when the project crosses a certain hurdle. The brighter side is that it may facilitate some degree of correction in land prices.

The proposition to change the criterion for inclusion of existing projects from commencement certificate to completion certificate is a pertinent one. It is anticipated that such a retrospective applicability to projects where sales would have already happened, will face serious transitional issues. If promoters have sold with inadequate or dated approvals, they may find it difficult to register their projects and may run the risk of complaints and subsequent refund demands, which will create further liquidity pressures. At the same time, the disclosures will provide much more confidence to prospects in their decision making process and are expected to increase the velocity of fresh sales.

For a sector considered as one of the most over-regulated, real estate and housing surprisingly did not have a regulator qua consumer. The size of the industry, political patronage and money power kept the consumers marginalised due to the lack of information and redressal forum. While the Real Estate Regulation & Development Bill (RERDB) seeks to improve transparency in the sector and provides a machinery for the speedy redressal of disputes — due to the lack of control on all aspects of the subject it seems to have limited teeth issues like opaque development regulations and discretionary powers provided within them leads to ambiguity and corruption — the Bill does not provide anything to make the process more transparent.

Another issue which plagues the industry is the lack of answerability from the authorities’ side in terms of timelines for approvals and the frequent change in laws which compel builders to often move to the court to seek clarity or resolve problems, which results in increased cost and timelines. The archaic land laws in the country also have a significant role to play and title insurance is lacking. The powers of this regulatory authority do not cover the other key participants of the industry like the approvals authority, architects, engineers. While their roles, responsibilities and accountability are covered under their specific acts, the inability to bring them within the purview of the core regulatory authorities makes it to some extent incomplete. It fails to completely address the money laundering issues faced by the industry.

The Bill is likely to create an initial shake out in the industry due to working capital pressures and regulatory oversight. It may also open possibilities of further delay and corruption due to an additional regulator.

Overall the regulation is a much needed step towards regulation of the sector — it will certainly improve investor as well as consumer confidence and promote growth. The move may result in improved credibility and reduce the risk perception of the industry which will eventually lead to lower funding costs. Large financial investors in the sector are also looking to investing in a more secure environment. In summary, the law will bring a painful but welcome change in the industry to make it a key driver of GDP and fulfilling the dream of housing for all. 

(The author is a Partner at BDO India LLP)