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Many loopholes in RERA

By Shivanand Pandit*


The Real Estate Regulation and Development Act (RERA) is a progressive Act in the history of the Indian real estate sector. The Act aims to regulate the sector by bringing lucidity for both the buyers and sellers. It envisages establishment of a regulatory and appellate authority for settlement of grievances and contains various pro- buyer provisions. The Act is expected to increase home purchases due to increased investor confidence in housing projects. .

In the year 1991, India faced a crisis of foreign exchange reserves. In the aftermath of the events, many sectors received a boost due to a sudden inflow of foreign direct investment. One of them was the real estate sector, making it one of the reagents of the sensational growth of the Indian economy. It is also one of the largest employment and gross domestic product generating sectors.

However, the real estate sector faced some tough times during the period of global economic crisis in 2008. People lost their faith in realtors, banks withdrew the low-interest rate policies and the sector went into recession.. But in the past few years, the sector is on the revival path once again. According to various reports, Indian real estate sector’s future looks sunny and it is anticipated to touch US$180 billion by 2020.

In spite of being a well-drafted statute there are many shortcomings in RERA that have to be tackled on a priority basis. Some of them are as follows:

The obligation of depositing 70 per cent of project money in an escrow account can be manipulated. The prerequisite of certification by an engineer, an architect and a chartered accountant before withdrawing any amount is ineffective since they are all paid by builders and are likely to make reports in favor of the builders. Hence, there is an apparent divergence of interest.

Postponements and wrangles in withdrawal of amounts might lead to litigations endangering the projects. Hence, the Act fails to address the problem of black money investment in real estate business. Further, the cost of land and construction of the project might be higher than 70 per cent of the total cost of the project. This may lead to borrowing of funds to raise the cost of the project with interest cost which will eventually increase the cost of the project and saddle the consumers.

It will be tough for builders to sell units based on carpet area for buildings which are under construction and where some units have already been sold under super built up area. Therefore, an exemption to this effect is needed to settle the conflict.  Further the word ‘net usable floor area’ must be defined in the Act for superior clarity.

There is a provision on fiscally chastising the promoter for delay in finishing point of projects. However, in case such a delay is caused due to hindered governmental approvals then the promoter should not be punished. Hence, such an exemption should be added under the appropriate provision.

The time limit for the arbitration process by RERA and Real Estate Appellate Tribunal might not work as anticipated. There were time limits for adjudication of real estate disputes on the consumer courts as well and no complaint was disposed off within the time frame of 90 days. Hence, the time limits under the Act are also unlikely to work.

The allottees can receive benefits under the Act only after one year which is the time scaffold for the respective governments to establish RERA and REAT. There is also a time limit of six months for different states to make rules for carrying out stipulations of the Act. Looking at the governmental will and constancy of governments in different states, the adherence to the timelines might be sporadic with some governments establishing resourceful bodies while some may not.

Many branches and procedures will have to be updated along with up-gradation of land records and bringing uniformity between circle rate and market rate. Since, most of documents in real estate sector are hand-written it will be a superhuman task to encapsulate all that on an online database which will also demand a lot of time. Moreover, grasping the ownership design would be crucial for guaranteeing transparency under the Act.

The Act may not be executed competently due to dawdling strategies in execution of the provisions of the Act. This may be due to conflict of interest of the politicians who have a major stake personally in the real estate sector. Hence, political foot-dragging might be a major roadblock.

The laws relating to rights over land, land improvement and settlement of land are under the state list. Therefore, laws in the states of Haryana and Maharashtra differ from the Central Act and there might be disagreement between the two laws. Though the Maharashtra Housing (Regulation and Development) Act, 2012 has been repealed specifically under the Act, the one for the state of Haryana has not been which will be nonstop source of misperception in the state though the Central Act will supersede the state Act.

Home-buyers or financial creditors?

The the Union Cabinet approved, by an ordinance, amendments to the Insolvency and Bankruptcy Code, 2016 (IBC) giving home-buyers the status of “financial creditors” in the insolvency process. By doing so, the Union Cabinet has unheeded the recently enacted RERA Act which is a distinct legislation to protect the welfares of home-buyers. RERA treats home-buyers as consumers and provides a consumer-friendly dispute resolution mechanism through an exclusive authority and appellate tribunal for the home-buyers. Should we really need to classify home-buyers as “financial creditors” under the IBC? This is the question.

Post the recent ordinance promulgated in June 2018, home buyers are encompassed in the group of financial creditors under the IBC, thereby climbing up the stepladder of preference in recovery events. Money given to real estate companies by homebuyers gets the commercial effect of a borrowing. Home buyers can now form part of the committee of creditors that has the power to appoint the interim resolution professional and approve resolution plans, safeguarding that their interests are not backpedaled by other creditors. Being financial creditors, their voting share will be in proportion to the financial debts owed to them.

An insolvency professional can be appointed to represent the interests of home buyers when they exceed a certain number in the Committee of Creditors. However, the threshold for such appointment is still ambiguous.

It is not the first time that a clutter has been made of the laws in the banking and finance sector in India. Prior to the enactment of the IBC, we had several legislatures such as the Sick Industrial Companies Act, 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1933 and the SARFAESI Act, 2002. These legislations created a lot of mix-up. The same is the case with the situation of home-buyers now.

RERA was brought in to bestow the status of a “consumer” on home-buyers, and to provide them with a number of antidotes to impose their rights against real estate developers. However, the IBC, which is also a special law like RERA, would take primacy over RERA as it was passed later. The recent decree proves beyond doubt that the government lacks proper vision any apathetic approach in drafting laws would affect residents badly. There is no excuse in killing a sector-specific legislation like RERA without waiting to see its actual functioning.

To conclude, RERA is a constructive change in the real-estate sector by increasing accountability of the developers and establishing proficient forums for redressal. However, the Act cannot be implemented effectively till the political averseness in implementing the Act is disconnected. Many inherent loopholes of the law have to be plugged immediately. Any kind of loophole in real estate laws will also disturb the market competition in the real estate sector that will affect the consumers at large and will deteriorate the rate of economic growth of our nation. This will consequently lead to litigation due to stringent regulations in the real estate sector.

*The writer is a finance and tax adviser based in Margao


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