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Real State Act in India – Relief for buyers, if states implement it.

09, May, 2017


Real State Act in India – Relief for buyers, if states implement it.

The RERA or Real Estate (Regulation and Development) Act came into force on May 1. But regulation of realty will happen by fits and starts with large differences in terms of state-level implementation. Real estate is a state subject. Most state governments derive a significant share of revenues from stamp duty from the registration of sales, and from municipal taxes. The Centre also has a direct stake – in that rentals are supposed to be Tax Deducted at Source from this fiscal year.

Consumer oriented

Land prices generally trend up but also suffer deep corrections, often lasting years. Realtors often start projects, and leave them unfinished when they run out of cash. Buyers can be left in limbo for years. Since land prices are variable and subject to sudden sharp changes, the Reserve Bank of India sets a very high bar for real estate-related loans. Lenders are also wary because there can be multiple claims on the same land. For example, a realtor may buy some land and offer it as surety to raise cash. Then he might sell (unfinished) units on that land to sundry buyers. Those buyers also raise money by mortgaging their respective units. The same land is thus mortgaged to two entities. This is fairly common. If the project goes bust, which lender claims?

The Real Estate Act is supposed to be consumer-oriented and expected to help in cleaning up these malpractices. One of the provisions is that 70% of funds paid for a project must be retained for use in that project. Another provision is that realtors pay interest to buyers if there are overruns in time. Every unit is to be compulsorily registered. Changes in sanctioned plans have to be disclosed and agreed upon by buyers, and structural defects must be remedied. Buyers can also be penalized for late payments. The entire profile of every developer, including the number of outstanding legal disputes, must be posted online. There are penal provisions including jail sentence for violations of this Act.

Incomplete projects should fall under the Real Estate Act

One key provision is that ongoing and incomplete projects should fall under the Real Estate Act with retrospective effect. There is huge unsold inventory sitting with realtors in completed projects. There are also a lot of incomplete and undelivered projects where buyers have money stuck. It is understandable that the Act tries to tackle those problems. Nevertheless, it is disturbing since retrospective applications of any legislation usually lead to trouble down the line.

If it works on the ground, the Real Estate Act would bring about 83,000 registered builders under its purview. Better regulation and accountability would lead eventually to more investment flows into the sector. So the Act’s focus on transparency and disclosure looks good at first glance.

A Central Law

Electricity has central players and central laws and every state has local powers and local agencies. States have created their own rules in accordance with the Electricity Act, 2003, and its amendments. Each state has a regulatory agency on the lines of the Central Electricity Regulatory Commission. Similarly the Real Estate Act is a central law and it demands that each state create its own rules and appoints a regulatory agency. But electricity is a near monopoly with few private players and tariff caps set by regulatory commissions.

Real estate sector is riddled with corrupt practices. Realtors pay in a mix of black money and white for land and for necessary conversions and clearances. Very few sales of property are made completely in white either. Primary sales from realtor-buyer have a very large white component. But there is always speed money involved in the registration process. Secondary sales usually have a much larger black component.

In the broadest terms, complex industries such as real estate cannot be micro-managed in detail by setting up rules. There will always be loopholes and more loopholes within the loopholes. Nevertheless, the Act could improve delivery and customer service norms within the industry. We will have to wait and see what it actually delivers.


Posted by : Satish Singh

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