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India’s real estate bill: A step toward good governance and transparency

Anurag Jain  Head of Risk Business, Thomson Reuters, South Asia

Anurag Jain  Head of Risk Business, Thomson Reuters, South Asia

The Indian government is working on a series of nation-building reforms and initiatives. These include an effort to encourage companies to manufacture products in India (Make in India); an urban renewal and retrofitting program (100 Smart Cities); a campaign to ensure government services are made available to citizens electronically (Digital India); and an action plan aimed at promoting bank financing for start-up ventures to boost entrepreneurship and encourage startups with jobs creation (Startup India).

Additional proposals include relaxation of Foreign Direct Investment (FDI) norms, a bankruptcy and insolvency bill, Real Estate Investment Trusts (REITs), and more.

Transparency, governance and accountability in real estate

A key reform this year has been the passage of the Real Estate Regulatory Bill by both houses of Parliament in India. This brings for the first time ever, transparency, governance and accountability in the sector whose functioning has been considered opaque and where information asymmetry and potential money laundering fraud has had maximum scope. The law will eventually segregate quality developers from casual operators, giving consumers a sigh of relief from corrupt practices in the sector.

The bill, which provides for the establishment of a Real Estate Regulatory Authority (RERA) in each State/Union Territory, will bring in much-needed professionalism by regulating both commercial and residential transactions, all of which will be overseen by the RERA. The bill also establishes a fast-track 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.

Firstly, developers have to mandatorily 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. Promoters are barred from modifying plans, structural designs and specifications of the plot, apartment or building without the consent of two-third allottees after disclosure.

A teacher holds a plate with coloured powder before hurling it on her students as they celebrate Holi, also known as the festival of colours, in the western Indian city of Ahmedabad March 7, 2012. The traditional event heralds the beginning of spring and will be celebrated all over India on March 8. REUTERS/Amit Dave (INDIA - Tags: RELIGION SOCIETY)

Developers with delayed projects will face fines

Under the new bill, developers whose projects are delayed will face a stiff fine. In a 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 also have to bring in greater professionalism in their project management skills 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. While the Act aims to regulate and revamp the sector, some issues have not been addressed. Single-window clearance, a key demand remains unfulfilled. Typically, realty projects need more than 50 approvals.

With the new law coming into force, developers who wish to maintain their reputation and do good business will have to adopt industry best practices. Greater compliance by disclosure of necessary information and commitment to timely delivery will boost customer confidence.

Changes may encourage foreign investment

The real estate sector will benefit if foreign companies invest in it. With RERA coming into force, developers will have to ensure that they are in compliance with overseas laws such as the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act. Realty companies in developed markets will not look warily at a sector that has lacked transparency and good governance.

Developers will now have to streamline internal procedures to comply with the new norms. Forward-looking companies will appoint a compliance officer and kick off initiatives to create a culture of compliance within their organizations. From an HR standpoint, developers would do well to provide risk and compliance training to their staff.

The real estate in India is expected to witness an uptick in foreign direct investment given the improved eco-system of transparency and compliance that the bill is expected to usher in. However, transitions are never without pain. Documenting governance procedures, automating processes and ensuring data security will transform the Indian real estate and bring it on par with global standards.

Learn more

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