Institute of Cost Accountants of India
WIRC Bulletin-April 2018

Governance in Real Estate – Developers’ Liabilities & Liberties by CMA. Dr.V.V.L.N. Sastry

India’s real estate sector has often been criticized for lack of transparency and poor governance standards. The required practices of governance are not followed completely by any single real estate company. There is a vast gap between the industry’s culture and its governance systems. Both imply a combination of rules and procedures that drive behavior. Hence there really should be a close resemblance between the code of ethics of an industry and the principles that guide its governance.

To have a dream house is a very special aspiration of the middle class and is part of the right to life as per our Constitution and the Government is bound to work towards this in a welfare state. However, on examination of the methodology, it becomes clear that the builders and all other agencies involved have swindled lakhs of purchasers by floating attractive schemes with misleading disclosures and in this process, fulfilling their personal interests. Builders have used these funds for their lavish lifestyles and establishing connections with the powerful. This tendency has also given rise to the emergence of real estate mafia all over the country.

The real estate sector involves small time players to huge corporate entities. The Indian realty industry has witnessed the entry of large, respected and responsible corporates in the past decade or so and thus has undergone a tremendous change. There have also been radical changes in the dealings of the sector which previously lacked ethics.

Thanks to the passage of RERA Act 2016, it has brought for the first time, transparency, governance and accountability in the sector whose functioning has been considered opaque and where there was maximum scope for information asymmetry and potential frauds. In due course, the Act will provide huge relief to consumers from corrupt practices by distinguishing between quality developers and the casual, unprofessional ones.

Real Estate Regulatory Authority (RERA) Act, in each State/Union Territory, will bring in the much-needed professionalism by regulating both commercial and residential transactions, all of which will be overseen by the RERA. The Act also fast-tracks a dispute resolution mechanism through adjudication and a Real Estate Appellate Tribunal.

While safeguarding the interests of the buyers and investors, developers will now have to comply with a host of new norms.

Registration of real estate project with RERA

It is mandatory for developers to register the projects with the RERA. There will be compulsory public disclosure norms for all registered projects that include details of promoters, project, layout plans, plan of development works, land status, status of statutory approvals etc.

Definition of carpet area

The Act defines Carpet area and the developers can sell units only based on carpet area which means the net usable floor area of an apartment. This excludes 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. With this, the buyers will get a clear picture of the usable space.

Cap on the receiving of advance payment

A promoter cannot accept more than 10% of the cost of the plot, apartment or building as an advance payment or an application fee from a buyer without first entering into a written agreement of sale with the buyer and registering the said agreement of sale. This is a step aimed towards curbing embezzlement of funds by notorious builders.

Adherence to sanctioned plans

Under the RERA Act, developers whose projects are delayed will face a stiff fine. In worst case scenario, the tribunals can recommend a three-year imprisonment term for developers found guilty of fraud. Developers will also be responsible for fixing structural defects for five years after transferring property to a buyer.

Mandatory disclosures and registrations will help reduce black money transactions in the sector. Developers will have to reorganize their internal processes and form compliance teams. They will be required to polish their project management skills to incorporate. They will also have to bring in greater professionalism to ensure timely execution and delivery.

A key provision of the bill mandates that builders will have to hold 70 percent of payments collected from home buyers in a dedicated escrow account until a project’s completion. This will prevent diversion of funds from one project to another and help eliminate unwarranted delays in project completion.

The promoter cannot make changes (additions or alterations) in sanctioned plans, layout designs or specifications as approved by RERA without the consent of person who has agreed to take one or more of the plot, apartment or building. For any other additions, alterations or assigning or transferring of majority rights and liabilities of the promoter, the consent of at least two-thirds of the allottees who have agreed to take apartments in such buildings and RERA should be taken, except the promoter himself. This will discourage the developers from increasing the cost of the project midway or acting against the interest of the consumers.

Compensation to the allottees

If the promoter fails to complete the project or is unable to give the possession of apartment, plot or building on the stipulated date, then, in case the allottee wishes to withdraw from project then he should receive interest and compensation as given in the Act or in case the allottee does not wish to withdraw from project, he should be paid interest for every month of delay at a specified rate, till the handing over of the possession. Further, in case of a structural defect, defects in workmanship, quality or provision of services or other obligations of the promoter as per the sale agreement, if the same is brought to the notice of the promoter by the allottee within 5 years of handing over of possession of the property, the same should be rectified by the promoter within 30 days without any cost implications. Failure to do so by the promoter entitles the allottee to compensation. This is a refreshing change from the previous position where the developers were not penalized or held responsible and there have been many instances where the developers have washed off their hands once possession of property has been handed over.

Penal provisions for promoters

There is a penalty of 10% of estimated cost of project or an imprisonment of three years for a promoter who advertises, markets, books, sells or invites people to purchase any plot, apartment or building without registration with RERA.

There is a further penalty which may extend to 5% of the cost of project for providing false information to RERA while registration under the Act. The miscellaneous penalty can extend up to 5% of estimated cost of the project. This will discourage developers from indulging in under-hand dealings and come down heavily on those who do the same.

While the Act aims to regulate and revamp the sector, some issues still have not been addressed thus providing liberties to the developers.

There are several projects that are exempted from registration such as- where the land proposed to be developed is less than 500 square meters, where the promoter receives completion certificate prior to the commencement of Act or where the renovation, repair or re-development does not involve marketing, advertising, selling or new allotment of any plot, apartment or building.

Some States have notified the rules that are completely in synchronization with the one notified by Central Government, but, some states have tweaked the rules.

The Act does not include the projects completed and undelivered by the developers to the purchasers, leaving scope for multiple and protracted litigations. The corporate developers who borrowed for development of the projects and did not deliver the units to the purchasers for some or the other reasons have exposed the purchaser to multiple risks.

Another concern is the determination of the stage of completion of a project. The exclusion of ongoing projects where 60% or more of the work is completed or those where sale deeds have been executed from the ambit of the Real Estate (Regulation and Development) Act, 2016 in some states, has come under the lens of the “subjectivity” of the criteria for exemption, has created a loophole favorable for developers to evade provisions of the Act. The completion level can be manipulated by the developers and most of the ongoing projects will be kept out of the RERA.

There will be some fair play only if Real Estate Regulatory Authority conducts an audit and not leave the disclosures just as procedural formalities required to be declared by the builder.

The word ‘net usable floor area’ must be defined in the Act for greater clarity.

Many departments and processes will have to be streamlined along with upgradation of land records and bringing parity between circle rate and market rate. Since most of the documents in the real estate sector are hand-written, it will be a Herculean task to capture all that on an online database which will also demand a lot of time. Moreover, understanding the ownership pattern would be critical for ensuring transparency under the Act.

Conclusion

This is the very beginning of transparency which India’s real estate sector desperately needs. Overnight redemption for stuck buyers is too big a hope from the Regulator. Each State Authority will need to rethink and refine the laws as and where necessary and ensure buyer protection.

Further, the Act cannot be implemented effectively till the reluctance in implementing the Act is removed which is a major roadblock. Hence, the Act needs legislative amendments by consulting the stakeholders involved as there is a huge scope of improvement coupled with removing any conflict of interest that the political class might have in the implementation of the Act.

 

One thought on “Governance in Real Estate – Developers’ Liabilities & Liberties by CMA. Dr.V.V.L.N. Sastry

  1. Very well Informative article on RERA. It is right that fair play only is expected if RERA conducts periodic audit. Further, there should be due diligence of disclosures made by the builders. In a recently launched RERA registered project in Mumbai booking of flats is made as per the approved plan for 20 floors but there is a rider that for want of NOC from Aviation deptt at present only 6 floors will be taken up. This leaves uncertainty for buyers who have booked beyond 6th floor paying 10% cost.

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