Posted on: August 1, 2013

Prashanth Kumar may not be able to shift to his dream home anytime soon. He was supposed to get possession of his flat in Noida last year but the construction of the building has been delayed by an indefinite period of time.

“We have found out that the funds the builder was supposed to use for this project have been diverted to a new project that he is about to start,” a distraught Kumar says.

Aggrieved home buyers such as Kumar will have cause for cheer if the Real Estate (Regulations and Development) Bill is passed in the monsoon session of Parliament. The bill proposes to make it mandatory for builders to pay a penalty to buyers if they fail to hand over the flats within the stipulated time. The legislation, which has been in the works since 2011, would be applicable to all residential projects over 4,000 square metre in plot size.

Also, the bill mandates that 70 per cent (or a percentage notified by the appropriate state government) of the money raised for a project should be deposited in a separate account to ensure that developers do not divert funds meant for a particular project to their other projects. This would be done to curb delays in project completion because of a shortage of funds.

“The bill should usher greater transparency, accountability and discipline into the real estate sector and, therefore, give a boost to consumer confidence,” says Anurag Jhanwar, director, CRISIL Real Estate Ratings, a global analytical company which provides ratings, research, and risk and policy advisory services.

Traditionally, buyer-builder agreements never favour the buyer in India. By 2020, the Indian real estate market size is expected to touch $180 billion. Yet the sector remains unregulated with builders having the upper hand in most cases. But the new bill brings some hope for buyers as it plans to look into issues such as false pre-launch advertisements, misrepresentation of the size of the property and the registration of projects.

“The bill will make it mandatory for developers to register all projects with a proposed regulatory authority, and put details such as project specifications, size, carpet area and sale details in the public domain,” says Jhanwar. This will ensure that the developer delivers on every commitment made in the brochure, he adds.

Also, developers would not be allowed to cancel an agreement for sale unless they have sufficient grounds to do so. And if they still do it, they would have to refund the amount collected along with interest. Further, if a major structural defect is brought to the developer’s notice within a year of possession by the buyer, the former will have to rectify the defects without levying further charges.

The bill also includes measures to protect buyers from misleading pre-launch schemes. For example, developers often soft launch their projects to a select group of buyers, typically priced at a 5-15 per cent discount to the launch prices. Experts say that these investments carry a substantial risk, as projects at that stage may not have received all the required approvals. To protect the interests of buyers, the bill includes a clause that says projects can be launched only after the developer secures all statutory clearances from relevant authorities.

The other important provision in the bill is that the sale of flats has to be on a carpet area basis and not on super-built area, as is the practice now. Take the case of Manoj Tiwari, a banker, who bought an 1,100 square feet (super-built area) flat in Noida three years ago. His builder increased the area by 40 square feet and is now charging him an extra sum of Rs 96,000 for it — something that was not mentioned in the builder-buyer agreement that he had signed at the time of purchase.

“We were not intimated about it beforehand. Now that they are about to finish the project, they have published the new super-built area in the new brochure. We have no scope of measuring the area, so how do we even know if the area has been actually increased,” asks an angry Tiwari.

The bill also calls for an appellate tribunal and a penalty for default, which will deter developers from duping buyers. “This will address the grievances of the consumer who now has recourse to either a prolonged litigation process in a court of law or consumer courts,” says Anuj Puri, chairman and country head, Jones Lang LaSalle, a professional services and investment management company.

However, despite the many good features of the bill, experts say it has some loopholes too. For example, the “mandatory penalty” that the developer has to pay the buyer in case he fails to stick to the delivery deadline is not clearly spelt out.

Right now, developers charge around 18-20 per cent penalty each time buyers fail to make the payment on schedule. But if the builder fails to hand over the property on time, the builder is supposed to pay a mere Rs 5 per square feet as penalty each month. In most cases, developers don’t even pay that.

“But the bill remains vague on this issue,” points out Niranjan Hiranandani, managing director of the Hiranandani group of real estate companies. “It only says that monetary penalties are to be imposed on the promoter and repeat offenders are also liable for a jail term. But it is not clear what sum is to be paid as penalty.”

Real estate developers are also dismayed by the fact that the bill does not include any provisions that make the process of getting various approvals faster and easier.

Experts say that developers in India have always complained that they experience inordinate delays because of the difficulty in getting approvals for construction from government agencies.

“Although the bill makes a provision for a 15-day window to either approve or reject projects, there is a big question mark on whether this deadline will be sufficient to obtain the plethora of regulatory approvals that are needed before construction can begin,” Jhanwar says.

Some feel that the bill also needs to be focused on promoting real estate in the country. “In a country like India, where the purchasing power of an average Indian is increasing, the bill should promote the real estate sector. At present, it is just regulating it,” says Hiranandani.

Clearly, the builder lobby will push for some changes to the bill before it is passed into law.


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