Focus on buyers: loopholes remain

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By

Rajiv Sahni
Partner, Real Estate sector, EY India

Contributor:

Chintan Patel
Director Real Estate sector, EY India

The draft Real Estate (Regulation and Development) Bill released last week by the ministry of housing and urban poverty alleviation is a forward-looking, well-intentioned policy, aimed to bring transparency in the sector, while safeguarding consumer interest. The Bill envisages setting up a real estate development authority to monitor real estate projects and ensure that in the long run, development happens in a planned manner through streamlined regulations.

The Bill, however, does contain a few sensitive areas. Therefore, a mechanism to discuss and address these provisions adequately is desirable to ensure that a smooth self-regulatory environment is created, which is desired by the Bill, though it may still be difficult to holistically satisfy all stakeholders.

What works for customers

Clear title: One of the most important regulations cited by the Bill is compulsory registration of most projects with the authority. Such projects are expected to evince significant consumer interest because registration will ensure that projects have clear land titles, free of encumbrances, necessary approvals and sanctions in place and formalized project configuration with regards to the number of units, layout plan and development timelines. This is a wise provision and will benefit the real estate industry at large.

Promoters are prohibited from marketing their project and accept advances unless the project is registered. This will protect the consumer and rightfully so.

Further, the registration process will be supported by a monitoring platform, whereby project details can be viewed online. This mechanism will ensure that the promoter plans the development strategy of a project effectively, while simultaneously helping the promoter in gaining customer delight for well-planned projects. Online availability of project information will significantly help customers take informed decisions.

Cash accountability: The Bill mandates the promoters to deposit 70% of the sale realization of a particular project in a separate account maintained with a scheduled bank. This fund would be used exclusively towards completion of a particular project. From the promoter’s standpoint, this clause would assist in efficient planning of cash flows. Further, timely execution of the project would ensure reduction in cost overruns. From the customer’s perspective, this clause guarantees that his proceeds are being used for the project. This protects the consumer and again rightfully so.

Timely possession: The Bill proposes to protect consumer interests by making the promoter liable to provide occupation certificate and execute the conveyance deed, while transferring ownership of the property to the consumer. Promoters are also required to fix defects in structural deficiency brought to their notice within one year of allotment.

The Bill has also made the proposed real estate authority responsible to provide timely approvals for registration of projects. The authority will provide detailed quarterly reports to the appropriate government with reasons for delay on projects where registration has not been granted in a stipulated 30-day time frame. This should dispel any fears of delayed approvals unless justified.

Hurdles for promoters

Sanctions and approvals: While the current draft has done away with bank guarantee and licence procurement clauses that were present in the erstwhile draft released in 2009, the problems faced by promoters in getting sanctions and approvals before the commencement of the project has still not been addressed.

It may auger well to have a provision in the Bill for a single-window clearance mechanism to expedite this approval process. A single-window clearance mechanism will eventually help homebuyers as the builder will be able to complete the project on time.

It is well known that this is one of the key challenges for the promoters since the number and nature of such approvals change significantly with varying complexities of development. For example, even after the commencement of the project, promoters have to approach agencies for various approvals such as floor plans. While the Bill mandates the authority to monitor the timeline for execution of the project, with strict fine imposed on developers for delays, it does not address the challenge faced by promoters in getting the approval that sometimes cause delay in project completion.

Offences and penalties: The clauses for offences and penalties for promoters in the circumstance of wilful failure to comply with regulations appear a bit harsh. The term “wilful” should also be adequately defined.

The Bill defines appropriate government in charge of implementation of the Bill as the central government in case of Union territories and respective state governments. For the states, the Bill is silent on the modus operandi of implementing the Bill from the administrative standpoint. The responsibilities of central and the state governments towards this endeavour should be clearly established to ensure seamless implementation.

Local authorities out of ambit

Finally, the Bill appears to keep various local authorities and statutory bodies, such as the state level municipal corporations engaged in the business of development, out of the authority’s ambit. It is recommended that such stakeholders, who play a key role, be included in the Bill’s purview to ensure accountability and efficient execution of projects.