A Progressive effort
The Real Estate Regulatory Bill has been waiting for a long time to be passed as a law. Though several recommendations by various bodies were incorporated into the draft Bill and approved by the cabinet, it has still not been passed as an enforceable law by the Parliament. The changes which have been made in the original draft over time are quite progressive. For instance, a developer must keep a minimum balance of 50% of the funds collected for his project in an escrow account. Before the Bill was drafted, the concept of creating an escrow account for a project in which to hold funds for a project did not exist at all. In the absence of such a regulation, builders are at liberty to siphon off funds collected for their projects and use them to purchase more land or construction of other projects.
The Bill will make it compulsory for builders to ensure that at least 50% of such funds will remain reserved for the development of the project for which they were collected. They will have to pay these funds into an escrow account within
15 days. While this will protect the interests of buyers, it still means that builders can use half of the funds collected for other purposes.
This gives rise to a pertinent question – why would they want to do that? Isn’t it in the builder’s interest to complete a project on time? Unfortunately, many developers don’t look at it that way. The reason they divert funds is so that they can purchase land to build land banks, which allows them to showcase more projects on their balance sheets. It allows them to raise more capital, and give an inflated image of the size of their business.
There have been other changes to the draft Bill, as well – each giving a clear message that the era in which developers could do whatever they want is going to be history once it is implemented. Not least among these changes is that developers will have to register all projects which they are constructing within three months once the Bill becomes a law. If they fail to do so, they will be penalised to the tune of 10% of the overall project cost, and will have to bear an additional penalty of 10% and even face a prison term for any further delay to register their project.
The Bill will also bring an end to developers’ freedom to make changes in the designs of their projects once they have been registered. They will only be able to make any changes if they are able to get the signed approval of at least 2/3rds
of those who have invested into the project. Projects which do not have completion certificates issued as yet are now also included, meaning that an even bigger segment of buyers will benefit from protection of their interests.
The current version of the Bill also includes commercial projects. Investors who have plugged their funds into office properties will also be protected. Real estate brokers and agents are also included in the latest draft and will be liable
for legal action if they engage in any practices which are not in line with the new law.
Finally, the latest draft permits customers with grievances to move the consumer courts, and does not position itself as their only legal recourse. With all these positive amendments now in place, the Bill is a powerful means to make the chronically opaque Indian real estate sector more transparent. Once it becomes a law, people will feel more confident in investing, and this will result in the revival. This confidence will take time to become evident, but it will definitely come – and when it does, we will see massive changes on the ground.