The Indian real estate sector has witnessed a roller coaster ride over the past two decades. The bullish run during 2007-08 was followed by a decline during the economic slowdown beginning mid-2008. The startling dip in foreign investment into the realty sector bears testament to this tumultuous journey.

By Neeraj Sharma, Partner, Walker Chandiok & Co LLP.

The Indian real estate sector has witnessed a roller coaster ride overthe past two decades. The bullish run during 2007-08 was followed by a decline during the economic slowdown beginning mid-2008. The startling dip in foreign investment into the realty sector bears testament to this tumultuous journey.

Since 2010, the realty sector has witnessed an emerging growth trend.

However, it needs to regain momentum immediately and thus there is a growing need to introduce reforms. This article looks at three key reforms, which are being currently pursued by the current government.

If addressed in the right manner, they will not only have a significant impact in changing the image of the sector, but also importantly, take it to the next level.

One of the key reforms initiated by the government a few years ago was to introduce a regulator for the sector, like the Insurance Regulatory and Development Authority (IRDA) for insurance and RBI for the banking community. This has been proposed via a separate legislation in the form of real estate (regulation and development) bill, 2013. The bill was introduced in the Rajya Sabha on August 14, 2013, after being approved by the Union Cabinet in June, 2013. It was developed with the intention to enhance transparency and accountability in real estate transactions, in the process, gaining confidence of the general public.

The bill aims to institute a regulatory oversight mechanism for facilitating disclosure, fair practice and accountability norms in the real estate sector, while also providing adjudication machinery for speedy resolutions of issues.

Its outstanding features:

n It mandates establishing the ‘Real Estate Regulatory Authority’ in each state/union territory as an enforcement agency empowered to impose penalties on defaulting developers. It mandates formulating the ‘Real Estate Appellate Tribunal’ in every state for speedy settlement of disputes

n Develop standardised definitions of ‘apartment’, ‘common areas’, ‘carpet area’, ‘advertisement’, ‘real estate project’, and ‘prospectus’, among others

n The bill aims to deal with the ‘carpet area’ concept to eliminate obscurity resulting from ambiguous sales terminology

n It proposes that all real estate agents be registered, and can sell immovable property registered with the ‘Real Estate Regulatory Authority’. Real estate promoters to deposit 70 per cent (or government mandated per cent) of cash received in separate bank accounts

n If developers fail to adhere to the provisions set forth, the ‘Real Estate Appellate Tribunal’ can impose penalties

n Penalty may go up to 10 per cent of the estimated project price, and continuous violation can invite imprisonment up to three years Gearing up to move the Real Estate (Regulation and Development) Bill, 2013 for consideration in the Rajya Sabha in the forthcoming winter session, the housing and urban poverty alleviation ministry recently met stakeholders of the sector to discuss the proposal. After these stakeholder consultations, the government plans to do a round-table of concerned ministers before firming up the official amendments to be moved, if required. There is also a suggestion from the real estate sector to be renamed as the real estate (regulation and promotion) bill.

The current regulatory oversight in realty includes managing a linear (or sequential) approvals process and dealing with outdated policy guidelines. This is not only onerous and time consuming for developers, but also adds to the overall project costs, which are eventually passed on to the end customer. Contrast this with the building control departments in the United Kingdom, which provide speedy approvals under a stipulated time frame.

The proposed Real Estate Act makes it mandatory for developers to obtain all sanctions and approvals required to undertake a project prior to marketing it externally. It is not surprising to see resistance from the developer community for the bill, which is silent on providing approvals under one roof. Real estate is a “State” subject and adding a regulation at a national level, without addressing the status of the current approval process at the state level, will only add to the delays.

If the Indian realty sector needs to flourish, it must move towards a regime of simplified regulatory and approval process. As a first step, the regulators should set up a single window clearance system which:

n Helps its customers achieve building a project that meets their expectations, while keeping in mind the building code and requirements of the common people

n Ensures that the level of diligence­/inspection is commensurate with the risk and need

n Empowers local authorities to enforce building standards and monitor compliance with modern guidelines

n Works cohesively with other regulators to provide seamless service to its customers

n Does a periodic assessment of its internal guidelines, after inviting due inputs from all stakeholders

n Offers end buyers an effective means of resolving disputes about compliance.

The complex and comprehensive Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, came into effect from January 1, 2014, replacing the archaic Land Acquisition Act, 1894. The act combines both land acquisition and rehabilitation and resettlement for the loss of land and livelihoods of those even marginally affected by land acquisition. It focuses on increasing transparency and involves prior consultation with local landowners and the local panchayati raj institutions.

There are a few points here, which are worthy of consideration:

n In the case of private projects, developers require 80 per cent approval of landowners while 70 per cent land owners’ approval is needed for private-public partnership projects

n The solatium amounts to 100 per cent of the total compensation and indemnity to land owners is proposed to be four times the market value in case of rural areas and twice the value in case of urban areas

n Food security is safeguarded by ensuring protection of multi-crop cultivated land and acquisition of such land should be only undertaken as a last resort

n Subsistence allowance of Rs 3,000 per month to be paid for 12 months to affected families. In addition, Rs 2,000 per month for the next 20 years to be paid as annuity; Rs 5 lakh per family or a mandatory job for one family member; Rs 50,000 for transportation and one-time replacement allowance of Rs 50,000

n Standardised definition of ‘public purpose’, ‘urgency clause’ for land acquisition, and ‘affected families’ for rehabilitation and resettlement

n Specialised and enhanced roles for panchayati raj institutions like gram sabhas to speed up acquisition process and reduce lawsuits.

Given the potential of the realty sector vis a vis the government’s plan under its mission of “Housing for all by 2022”, and the role of various regulators in different sectors (over the years), its time that the government pushes for these reforms in a speedy manner to have in place a regulated regime for the real estate sector so that unfortunate incidents of inappropriate land acquisitions and project developments without adequate approvals/ clearances do not occur at all.

Developers and organisations like (CREDAI, NAREDCO etc) are striving to change the perception of the sector and ensuring that realty is seen at par with sectors like information technology (IT), fast moving consumer goods (FMCG) and automobiles.

The article appeared in the Financial Chronicle. The article can be found here.