Real Estate Sector Reforms in 2016

Since the market reforms of 1991, which began with the abolition of Controller of Capital Issues (CCI) and industrial licensing, every government has tried to strengthen the market in one way or the other. Let us take the example of housing or real estate sector in India. Housing was a socialistic obligation of the Government in the late 70s and early 80s as the electoral slogan was ‘roti, kapda aur makaan’ which translates to food, clothing and housing for all. The opening up of economy reduced the entry barriers to the housing market. This period was marked with the rise of new real estate developers founded in the late 80s and 90s such as Oberoi Realty, HDIL in Mumbai and Sobha Limited and Brigade Group in Bangalore. The growth in the real estate market came with a whole gamut of scams and frauds. Of the many real estate scams, a few of them that made headlines were the Adarsh Housing Society scam in 2011, Karnataka Wakf Board land scam in 2012 and Noida land scam worth 3800 crores in 2012^[3].

The scams and frauds ranged from false promises and fly by night developers to legal frauds and substandard work. To add to this were cases of change in layout plan, land use without consent of allottee, land title fraud, hidden charges, delay in delivering possession and construction on illegally acquired land ^[4]. The end consumer had to bear the brunt as getting justice was long drawn process and often uncertain. The lack of a regulator meant the disputes had to be settled through the overburdened civil and consumer courts or the Competition Commission of India in case of unfair trade practices. The rise of scams and poor grievance redressal mechanisms, had cast a shadow over the real estate market.

Last year, the Parliament framed the Real Estate (Regulation and Development) Act 2016, which is a major step in reducing the transaction costs in the Indian real estate market. This act tries to reduce the information asymmetry in the housing market by making it mandatory for all real estate developers to register their projects with the new regulator called the State Real Estate Regulatory Authority (RERA) and provide all the relevant information such as project plan, layout, government approvals, land title status and schedule for completion. The law reduces the policing and enforcement costs as it allows the consumers to approach the RERA for redressal of grievances against any builder. It also provides for the adjudication of disputes in fast track Appellate Tribunals. These Tribunals are bound to decide over RERA’s order within 60 days. The RERA is even provided with the power to incarcerate and levy fines on developers who don’t comply with the Authority’s orders. The Act further mandates that 70% of the amount collected from consumers be kept in an escrow account with a scheduled commercial bank or a recognized lender. The reason for this being the use of funds collected shouldn’t be used for business expansion and other commercial projects not related to the consumers. The funds from this account can be used solely for the project to which it belongs. This can help in tackling frauds, delay in possession and siphoning of money from consumers.

This act puts in place institutions that will protect the interests of home buyers and will also provide greater transparency for real estate investors. By reducing the two components of transaction costs namely, Search and information costs & Policing and Enforcement costs, the real estate market in India is set to get a fillip.

References:

[1] The Real Estate (Regulation and Development) Act, 2016 https://en.wikipedia.org/wiki/Real_Estate_(Regulation_and_Development)_Act,_2016

[2] Real Estate Regulator Bill: 10 things you should know about it Read more at:
http://economictimes.indiatimes.com/articleshow/51344872.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

 [3] 5 Multi-Crore Real Estate Scams in India http://www.siliconindia.com/realestate/news/5-MultiCrore-Real-Estate-Scams-in-India-nid-129479.html

[4] Remedies against unfair practices of builders and real estate developer

http://www.helplinelaw.com/govt-agencies-and-taxation/RBRE/remedies-against-unfair-practices-of-builders-and-real-estate-developers.html