Real Estate Regulatory Bill

Real Estate Regulatory and Development Bill – Step in right direction, but just 1st hurdle cleared

Union Cabinet of India passes the Real Estate Regulatory and Development Bill which intends to project consumers of house space in the country by implementing best practices. The Bill proposes a regulator in each state / union territory which will address the industry issue and a tribunal for fasten the process of the disputes.

The bill would next be tabled in both the house of Parliament and then to standing committee before it becomes an Act. The Bill has just cleared the first hurdle and may take longer to be implemented at ground level.

Reasons for delay in project completion are addressed, but amending the ‘70% customer advance’ clause will lead to low uniformity

The Bill main intention is consumer protection in real estate space wherein project delay is major area of concern. The Bill addresses this concern by two proposed clauses – 1) the developer cannot launch a project before all approvals in place and 2) 70% & lower Customer advances, as stipulated by the state regulator, would be utilised only for development of project which is monetized. The second point here is been diluted from 70% to 70% & lower and also has given power to decide the share in the hands of state regulator. This amendment has diluted the effect of the point and would lead to higher red tapism in the sector.

The current Bill requires a lot of Clarity and doesn’t address many Loopholes in the proposals

The amended RE Bill has many points which needs clarifications or which has loopholes. Firstly, it doesn’t state that the state regulator will have to follow whose law when it comes to the State Bill and Centre’s Bill are at crossroads. The bill doesn’t provide clear demarcation in definition of a project and its phases as well as common amenities for assigning customer advances lock-in.

The bill implemented in the current form affects marginally to developers; lowering the churn of capital is the only concern

The current form of the Bill is diluted from the draft published in 2012. No pre-launches officially & registration of real estate agent would curb investor money in the sector when combined with 1% TDS clause introduced in Union Budget. But there are means to these issues which may lower the impact of the intent of the Bill. Hence, there would be some impact on the churn of capital as usage of customer advances would be restricted. Also, some cost of the company would increase in getting stipulated approvals from the state regulatory.

Interpretation of Key Clauses which may affect Real Estate Companies Clause Intent Current Practice Impact Clarity / Loophole

Clause:

A Real Estate Regulator in each state who will implement and address set regulations in that particular state

Intent:

To streamline best practices in the industry which is reeling under lot of issues pertaining to consumer

Current Practice

There is no single body who regulates the industry and its growing issues

Impact:

A lot of developers would have to streamline their operations to best of industry practices

Clarity/loophole:

Will the state regulator adhere to state level bill or this bill overwrites it

Clause:

The developer cannot launch the projects till all the approvals are in place and the project is registered with the regulator along with project plan

Intent:

To ensure timely completion of projects by making capital available

Current Practice:

A lot of developers would pre-launch the project and utilise the advance from sale towards getting approvals as well as other means

Impact:

The developer cannot do any pre-launch before getting project approvals and registering the same with the government authority. Hence they will have to deploy capital from other source then customer advances

Clarity/loophole:

The Company can always pre-launch and take advances and show it as short term debt. Later convert the same in customer advances at the time of launch. All the pre launches are done on understanding and trust between the parties

Clause:

Compulsory deposit 70% or lower funds received from allotees in a separate bank account. (The same was changed from 70% in 2012 bill to 70% or Lower in 2013 bill)

Intent:

To ensure timely completion of projects by making capital available

Current Practice:

A lot of projects completions are delayed because the developer utilise the customer advances for other means and assign approvals delayed as the reason.

Impact:

The developer cannot utilise the capital generated from one project, unless it is completed, to finance the capital requirement of other projects. This will lead to lower availability of the liquidity.

Clarity/loophole:

There is missing clarity on the definition of the project, as the industry phases out a single project. Can the developer utilise advances of phase 1 towards approvals of phase 2 and not deliver the common amenities, is not clear.

Clause:

Mandatory registration of real estate agents with the regulator

Intent:

To infuse professionalism in the intermediary role To curb money laundering

Current Practice:

With absence of any regulatory authority, there is no registration. Also, with no registration the agents launder the money through their account for a client.

Impact:

This clause along with TDS clause introduces in Union Budget 2013-14 will lead to curbing the transactions routed through multiple parties.

May curb investors from using RE as a medium for money laundering

Clarity/loophole:

The bill states the role of the agent but fails to address the repercussion of the falsification of information by him / her Also, there is no differentiation between a role of agent or a consumer played by the same person.

Charges for putting out misleading advertisements related to the projects carrying photographs of actual site.

Removed in 2013 Bill.  Was part of 2012 Bill

Written Agreement with the buyer needs to be registered before taking more than 10% of advances

Removed in 2013 Bill. Was part of 2012 Bill

Source: Emkay Research, Housing Ministry