An Explainer To 4 Controversial Clauses In The Real Estate Bill

Few expect the draft Real Estate Bill to pass without a storm. It is the Narendra Modi-led government's first move to regulate the vast real estate sector in India. The very delay in regulation is an indication of the power of various interest groups, one of the many reasons for various forms of opposition to the Bill. The other reason is the protests from the Opposition parties. The Congress government has been zealously defending its version of the original draft while rejecting the changes made by the present government at the Centre. The objective of a regulator is to ensure transparency and benefit the consumers who have been battling builders in courts and other forums with few remedies in place.

Will there be enough remedies that can come to the consumers' aid? Let's run through the clauses in the Bill that have caused controversy:

Controversy: Deposit amounts cut deeper - The UPA government's version of the real estate bill mandates builders to deposit 70 per cent of the amounts received for a real estate project from the allottees in a separate account in a scheduled bank. This is expected to be done to cover the cost of construction. Modi government's amendment reduced this amount to 50 per cent. It further specifies that the extent of amount deposited could be lesser as per the notifications of the state government. Is it true? Opposition leader Rahul Gandhi has been making a huge hue and cry that the move will help builders. But the rule in its form allows itself to be altered by the state government. It comes to the aid of the under construction properties in India where the cost of the land is more than 30 per cent of the cost of the project, especially in case of the metros. Apart from this, the move does not bring in much difference to the opaqueness of the flow of real estate money. Even today, many builders demand 25 per cent of the project cost in the form of cash, which is not accounted for in the form of tax or others. This enables the builders to inflate the cost of construction to get around the 50 per cent deposit rule, without having to officially account for it.

Controversy: No majority vote for minor changes: The draft Real Estate Bill disables a builder to make changes in the structural design of the plot, apartment or building and altering plans without the consultation of two-thirds of the allottees. This brings in consumers and investors of a project into the plans of their building during construction. While the move is hailed, an adjunct on the side allows minor additions or alterations for architectural or structural reasons. Is it true? As there is no definition specified by the government on the permissible changes, the rule can be misused by builders. A better approach to the law could have been getting permission from the investors of a property in India for any change that has to be made. This rule could force builders to be extra careful while they are the drawing boards thereby reducing delays.

Controversy: Sweeping under the 'carpet area': The UPA version of the bill defines carpet area much more clearly as the 'net usable area' of an apartment minus walls and other structures. The current government diluted the clarity as they brought in a newer term called 'rentable area', as defined by the National Building Code 2005. Addition of a new term into real estate where builders and agents are already use and misuse all the terms like built-up area, super-built-up area and plinth area, will further confuse the buyer. Is it true? A new term would be the new version of what is acceptable. It is very tough for a home buyer to imagine the amount of space that can come with the home that they paid for, in a property under construction. New terms and lack of specific definition of what is used regularly can lead to mis-selling of property in India.

Controversy: Courts kept out of jurisdiction: The draft bill has a provision to bar jurisdiction of court and any authority from entertaining complaints in respect of matters covered under the bill. This might hurt consumers who see it as a last form of justice. The bill has its own version of compensation and enforcement in the form of talks about penalties for failing to comply with the rules, which can go as high as 10 per cent of the cost of the project. This is apart from punitive action like deregistration. Taking it a little further, it also threatens unyielding promoters with jail sentence in cases of serious offence. The government also came up with tribunal to settle disputes on these matters. They also direct real estate companies to compensate consumers when a project is delayed. Is it true? Compensation and penalties are good ways to ensure that a consumer gets justice. However, many such cases have gone to courts where a number of builders emerged scot free citing force majeure, i.e. delays due to circumstances beyond their control. It has been proven to be an assured way out for real estate developers to take responsibility.

Will the regulator have teeth? The pitfalls of coming up with a regulator after decades of the evolution of a sector, leaves regulators with many powers that cannot be used. The builder's lobby is too big and too intimidating for a regulator to chase them. The correct approach to forming a regulation is while a sector is growing like in the case of telecom. The strength of the telecom regulator lies in the fact that it controls the spectrum used by the operators. They are also the allotting authority. If telecom operators miss deadlines to rollout services, the regulator has the power to confiscate the spectrum and it has been done in a few cases, irrespective of an equally strong billionaire-run telecom lobby. So goes the case of oil regulator or the Directorate General of Hydrocarbons which also controls the blocks allocated for exploration.

A real estate regulator has no such carrot at the end of the stick. It has no control over land banks adding to the fact that the power will be divested to the state regulators who can form their own regulations. While registrations can be controlled by the regulator, it will take time before they become as powerful as licences.

(Katya Naidu has been working as a business journalist for the last nine years, and has covered beats across banking, pharma, healthcare, telecom, technology, power, infrastructure, shipping and commodities)