All you wanted to know about the Real Estate Bill

Dec 11, 2015

28

On December 9, 2015, the union cabinet led by Prime Minister Narendra Modi approved the Real Estate (Regulation and Development) Bill, 2015, as reported by the Select Committee of Rajya Sabha.

In May earlier this year, the bill had been sent to a Select Committee of the Rajya Sabha. The union cabinet has accepted all the suggestions made by the Select Committee. The Bill will now be put up before both the houses of Parliament.

So what does the Bill have to offer? The real estate market in India is an excellent example of information asymmetry where one side has much more information than the other. In this case, the real estate promoters and the real estate agents have much more information than the home-buyers. Even getting something as basic as the going price of an apartment in a given area is very difficult.

The Rajya Sabha Select Committee on the Bill met real estate consumers and this is what it had to say in its report: "These consumers were unanimous in their submission that they have no means to know about the real status of the project for example whether all the approvals have been obtained, who is holding the title of the land, what is the financing pattern of the project and what has been the past record of the builder etc.? As a result, they invested their money without having any information about the project. In many cases, they were not given what was promised to them and in almost all cases the project was delayed."

The Bill seeks to tackle this information asymmetry and the fact that the real estate sector does not have any single regulator regulating it. The Bill talks about setting up of a real estate regulator (Real Estate Regulatory Authority to be very precise) in every state and union territory. A real estate promoter needs to register a project with the real estate regulator before he starts selling or advertising it.

Projects with the area of land proposed to be developed exceeding five hundred square metres or where more than eight apartments are to be developed, need to be registered with the real estate regulator of the state they are based in.

Advertisement
  Equitymaster Conference 2016  
23rd January. Mumbai, India
   
  It gives us great pleasure in extending you an invitation to join us at the Equitymaster Conference 2016. This is going to be one of our most important Conferences ever! And I strongly recommend you attend it.

At the Equitymaster Conference, our best ever line up of speakers, starting with Ajit Dayal (Founder, Equitymaster) and Bill Bonner (Founder, Agora Inc.) will aim to address all your questions about the current investment environment, thereby help you in planning your next steps. Including...

»  Where are the stock markets headed?
»  What should be your investment strategy for Indian stocks?
»  Is it finally time to get bullish on real estate?
»  Is the Gold story over?
»  What's next for India's economy, and the Indian Rupee?

Plus, at the Conference you will get an opportunity to rub shoulders with not just our speakers, but also like-minded investors from across India (Last year we welcomed guests from 33 cities, and 3 countries).

So if you are serious about your investments, The Equitymaster Conference 2016 is something you cannot afford to miss. More details about the Conference and our speaker line up are available here.

We suggest you move very fast on this invitation.

Reserve your seat under our 'Early Bird' opportunity!
 

The application to the regulator needs to be accompanied with details like the real estate projects already launched by the real estate promoter in the past five years. It also needs to be mentioned whether these projects have been completed or are still under development. If the projects has been delayed, the reasons for the delay need to be mentioned.

Over and above this an authenticated copy of the approvals and commencement certificate from the competent authority also needs to be submitted. Other important details like land title, the layout plan for the proposed project, the location details of the project, also need to be submitted to the regulator.

After an approval is granted by the real estate regulator, the real estate promoter will have to upload all these details on to the website of the real estate regulator. Any advertisement of the project should have the precise link to the project details as well.

At the time of booking and issuing an allotment letter to the buyer, the promoter needs to make available to the buyer, the time schedule of completion of the project, including the provisions for civic infrastructure like water, sanitation and electricity. Many real estate companies over the years have sold homes without the basic amenities in place.

In some cases, housing societies have even lacked a water connection and have needed to get water delivered through water tankers almost on a daily basis for years. The Real Estate Bill hopes to correct this. It also hopes to correct the information asymmetry that prevails in the sector up until now.

The Bill also allows any real estate buyer to file a complaint against the real estate promoter or real estate agent with the real estate regulator in case any violation of the provisions of the Bill as and when it becomes an Act.

A major problem with the sector has been a delay in the delivery of homes. One of the major reasons this happens is because real estate companies announce a new project, raise money and then use that money either to complete an earlier project or pay off debt.

This has led to a situation where many projects have been delayed endlessly given that the trick of starting a new project and raising money doesn't seem to be working anymore. The Bill seeks to correct this situation. The real estate promoter needs to maintain 50% or "such higher percent, as notified by the appropriate government" of the amount raised from the buyers of homes, in a separate bank account.

This money can be only used for the cost of construction and can be withdrawn by the real estate promoter in proportion to the percentage of completion of the project. This is one of the major clauses in the Bill and if implemented correctly can bring huge relief for the buyers.

This clause has been diluted. In the original version of the Bill, the promoter needed to maintain 70% of the amount raised in a separate bank account. The reason offered for this dilution is that in many cases land prices form a major part of the project and maintaining 70% of the money raised in a separate bank account isn't the best way forward.

Further, up until now the buyer while buying a home had no clue about what exactly was the area that he was paying for. The Bill defines the term carpet area exactly as: ""carpet area" means the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment." Again, if implemented well this clause can bring huge relief to home buyers.

Real estate agents will also need to register with the regulator. This is another good move where not anyone and everyone will jump into become a real estate agent or a broker, as is the case currently.

Also, currently the real estate promoters keep changing the plans as they keep building the project. Once the Bill becomes an Act, this may no longer be possible. Any alterations to sanctioned plans, layout plans and specifications of the buildings or the common areas within the project will need written consent of at least two-thirds of the buyers other than the promoter, who have bought apartments in the building.

This is another buyer friendly measure. On a jovial note what this means is that real estate promoters will have to stop advertising all those swimming pools which are planned at the time a project is launched but never get built.

Up until now buyers have had to pay a huge rate of interest every time they miss a payment to the real estate promoter. But the promoters never pay or at least don't pay the same high rate of interest, if there is any delay on their part. The Bill essentially calls for the same rate of interest to be paid by the real estate promoter as well as the buyer in the eventuality of a default on either side.

Further, if the promoter violates any one of the provisions under section 3 of the Bill he shall be punishable with imprisonment for a term which may extend up to three years or a fine which may extend up to a further 10% of the estimated cost of the project, or with both. Section 3 of the Bill basically deals with the real estate promoter having to register with the real estate regulator before launching a project and then following a series of buyer-friendly steps.

On paper, the Bill seems to be well thought out and takes care of the all the issues that buyers have had with real estate promoters in the years gone by. Nevertheless, the implementation of the Bill as and when it becomes and Act, will be carried out at the state government level. And whether state governments carry out the implementation in true letter and spirit remains to be seen. I have a few reservations regarding the implementation of the Bill when it becomes an Act, which I shall discuss in a column next week.

Postscript: The Rajya Sabha website has uploaded the Select Committee's recommendations as well as the Real Estate Bill in a scanned format instead of uploading the proper report.If Digital India is the way forward this is clearly not done. Information needs to be made available to everyone in the most accessible way. Hope the concerned authorities are listening.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

Has Arun Jaitley Been Reading India's Big Government? October 23, 2017
If self-employment is the way out for India's jobs crisis, then the government should create conditions encouraging it.
Get 'India's Big Government' at Just Rs 199 Now October 18, 2017
Vivek's latest book is now available at a rare discount. Grab a copy now.
Our Plan to Save the Ranch October 18, 2017
How to increase fertility in the kingdom of cows.
Nobody Honks in Bali - Lessons for Indian Tourism October 17, 2017
Things India can learn to promote tourism from this small island.

Equitymaster requests your view! Post a comment on "All you wanted to know about the Real Estate Bill". Click here!

4 Responses to "All you wanted to know about the Real Estate Bill"

Suresh

Dec 11, 2015

You say that the builder will have to maintain 50% of the money collected from investors in a separate bank account down from the earlier proposed 70%. Whereas reports in the Economic Times and other media state just the opposite. Infact the report in ET states "Builders will have to deposit at least 70% of the sale proceeds, including land cost, in an escrow account to meet construction cost, compared with the earlier proposal for 50% or less, and pay interest to home buyers for any default or delays at the same rate they charge them."


Like 

N P Huria

Dec 11, 2015

You have mentioned that the amount to br kept in Escrow account has been diluted to 50% from earlier envisaged 70%. How ever a report in ET says it is otherwise i.e. it has been increased from 50% to 70%.
What is the correct position.

Like 

Shreedhar V. Sarpotdar

Dec 11, 2015

I like Viveks style of writing! He makes it very simple for a layman to understand the subject on which he writes. Regarding new "Real Estate Bill" I have one point to make. There should be some provision in the bill by which Developers/Builders are forced to convey the property ( Conveyance Deed ) to registered society at the time of Registration only. Till the time it is done the project should not be treated as completed.

Reagrds

S. V. Sarpotdar

Like 

Narayanan

Dec 11, 2015

Your commments on real estate bill are very valid from the buyer's point of view. most of the developers have taken buyers for a ride in terms of delay, modification of plan etc.

but from the perspective of real estate industry, the bill is one sided and does not address the various ills of corruption, delays in approval mechanism and other deterrents which make even honest intentioned developers unable to meet commitment. example was the pune developer who recently commited suicide. without addressing the negatives, just putting all onus on developers will only hurt the corporate/well intentioned developers and the industry. buyers only make stage wise payment. if 70% of payment goes to escrow a/c, the cost in terms of land purchase/development/approvals/interest cost already incurred during first year will not be recovered by developer in terms of liquidity.

request your comments about ease and transparency of approvals

Like 
  
Equitymaster requests your view! Post a comment on "All you wanted to know about the Real Estate Bill". Click here!