The cabinet approval of the long-pending Real Estate (Regulation and Development) Bill, 2013, is a significant first step towards bringing in transparency and governance to the sector. The new bill will create the framework for a regulatory body, the Real Estate Regulatory Authority (Rera), which will act as the central agency to coordinate the development of the sector, as well as promote transparency, efficiency and competitiveness.
The move is also expected to boost domestic and foreign INVESTMENT in the sector and help achieve the Indian government’s objective to provide housing for all by 2022 through enhanced private participation.
The new regulations, covering both residential and commercial properties, REQUIRE mandatory public disclosure for all registered projects. This includes details of promoters, the project, layout plan, plan of development works, land status and status of statutory approvals. It will also require the disclosure of pro-forma agreements, names and addresses of all those involved such as real estate agents, contractors, architects and structural engineers.
Furthermore, the bill seeks to reduce the diversion of funds by REQUIRING 50% of the amount (or less as notified by the appropriate government) paid by homebuyers to be put into a separate escrow bank account to cover the cost of construction. The rules also bar promoters from altering plans, structural designs and specifications of the plot, apartment or building, without the consent of two-third of the buyers after disclosure.
Another significant change is regarding registration of intermediaries such as real estate agents. Stories of mis-selling by real estate brokers on incentives, which can run as high as 10% of the SALE price, are not uncommon. The new bill will allow real estate agents to only sell properties that are registered with Rera. A code of conduct will be established and will ensure that intermediaries maintain books of accounts, records and documents, and that they are not involved in any unfair trade practices.
The bill will, no doubt, bring transparency and accountability to real estate transactions, and also provide a way to cut down on undeclared monies.
However, there is some skepticism on the effectiveness of implementing these new regulations, and whether it is at all possible to monitor rogue intermediaries and developers. And as land is governed by the states, there may be one or more Rera in each state or Union Territory, which will lead to potential confusion and conflict.
Lessons from MUTUAL FUNDS:
While there may be a need to look at established international real estate regulatory bodies such as those in the UK and Dubai, the domestic MUTUAL FUNDS industry, too, can provide some valuable lessons. The Securities and Exchange Board of India (Sebi) has been running a regulatory model for the past 20 years to govern the MUTUAL FUNDS industry. The objectives of the Sebi Act, passed in 1992, were to protect the interest of investors in securities and to promote the development of and to regulate the securities market.
In 1993, Sebi introduced the Securities and Exchange Board of India MUTUAL FUNDS) Regulations, which paved the way for the entry of private sector companies into the industry.
One of the key milestones in this journey has been the establishment of the Association of Mutual Funds of India (Amfi) as a self-regulating organization for asset management companies, in 1995. Other achievements include registration by assigning unique identifiers (Amfi registration number or ARN), uniform certification of intermediaries by the National Institute of Securities Markets, establishing a code of conduct and appropriate fee models for distributors and, more recently, introduction of the Sebi (Investment Advisers) Regulations, 2013.
Rera moving forward:
The real estate regulator, too, should consider appointing a credible self-regulating organization for developers. The role of this organization would be to define and maintain high professional and ethical standards in all areas of operations and to establish a code of conduct for its members and intermediaries. Real estate intermediaries may also be REQUIRED to obtain a certification from the regulator to ensure a minimum standard of professional conduct. This would ensure that only professional individuals and institutions advise on real estate.
According to the bill, Rera has a provision to fast-track dispute resolutions through adjudicating officers (the district judge) and through creation of a Real Estate Appellate Tribunal to hear appeals from the Authority and the adjudicating officer. However, there should be a provision to handle minor grievances on similar lines of the Sebi Complaints Redress System (SCORES). INVESTORS can lodge complaints online with Sebi through SCORES and subsequently view its status. A customer-friendly grievance handling system can address the lack of trust prevalent among real estate buyers.
The INVESTMENT industry has taken 20 years to arrive at its current level of regulation and professionalism. The real estate sector can fast forward the process by taking a leaf from existing models, both inside and outside the country, to increase its transparency and professional standards.