Part II: Major Loopholes in the Real Estate Bill to watch out for
Ongoing Projects included in ambit
Certain provisions in the Real Estate Bill which need to be relooked at, like bringing ongoing projects under the ambit of the proposed law. Experts feel this will create a lot of confusion and will this mean that work will stop in such projects till registration of such ongoing projects is given. They believe that the Bill should be prospective not retrospective as it will stall ongoing projects and all including consumer will suffer.
Inclusion of Commercial Real Estate
The Bill now also covers commercial real estate, however the two asset classes of residential and commercial real estate need to be looked at differently. According to developers, a commercial asset is often leased and about 80 per cent of the business of commercial sector is of leasing, wherein cash flow for developers only begins after the building has been constructed and clients have moved in. In such a scenario provisions such as maintaining 50 per cent receivables may not be suitably applicable to commercial real estate.
Promoters’ Deposit reduced from 70 to 50 per cent
Promoters have to deposit 50 per cent instead of the earlier proposed 70 per cent of the amounts realised for the real estate project from the allottees in a separate account in a scheduled bank. Experts feel that a leeway of 20 per cent will effectively leave more in the hands of developers to continue their practice of diverting funds collected for a project towards other projects.
Shortage of Housing Supply Feared
Market analysts feel that once the Bill becomes a law, supply shortage is imminent in the residential sector as developers cannot market or launch a project before obtaining all necessary project-related permissions. This means they will have to arrange funds for obtaining approvals and registering projects, squeezing out cash from balance sheets.
Provisions may lead to Corruption
The Bill offers deemed approval for projects after 15 days of submission of documents, after which regulator has the power to scrutinise the documents and cancel the approval. However experts feel that post review of documents after the specified 15 days’ time frame is not a good idea as this will open a huge window for corruption. This process should have been automatic. Apart from that, the definition of willful defaulters is not quantified in the Bill, and the clause on revocation of registration could be dangerous for developers.
Incentives Demanded by Developer
The developers seem to be at the receiving end of the Bill and may have to bear the brunt of many provisions. To give them a fair deal, the government is working on a mechanism to grant sanctions in one month’s time through an expert panel appointed by it. Currently, developers need to take at least 50 approvals before they can launch a project. If the government creates single-window clearance, the prices of houses could come down by 15-20 per cent. Today when clearances are stretching beyond one year, approvals in even 100 days will be a big relief provided all approvals are done in a time- bound manner.
List of Penalties for Builders
The Real Estate Regulatory Bill puts the onus on builders to provide all correct information and adhere to all rules strictly. In case of any non-compliance on the builder’s part, he is liable to face the following punitive actions:
• The penal provisions under the proposed law include a payment of 10 per cent of project cost for non-registration and payment of additional 10 per cent of project cost or three-year imprisonment for the builder or both if still not complied with.
• For wrong disclosure of information or for not complying with the disclosures and requirements, payment of 5 per cent of project cost will be imposed on the builder.
• The Bill provides regulatory authorities the power to cancel project registration in case of persistent violations and decide on further course of action regarding completion of such projects.
• For all registered projects, the time frame for completion must be clearly mentioned and adhered to. The developer is expected to receive all approvals from local authorities before marketing the project. The buyer will also have the right to obtain stage-wise completion schedule.
• Flowery ads with misleading data on project location, appearance and amenities will be discouraged, thanks to strict guidelines on advertisement.
• Terms such as carpet area will be made uniform to ensure that there is no ambiguity in specifications. If there are quality issues after taking possession, the developer has the obligation to rectify them.
• Apart from developers, real estate agents will also be regulated. They have to be registered and should maintain books of accounts, records and documents. Promoters and agents can be punished for making misleading statements.
• The minimum balance to be maintained in the escrow account of a project has been reduced from 70 to 50 per cent. This provision will effectively allow developers to continue their practice of diverting funds collected for a project towards land acquisition or other projects, and will work in their favour by also allowing them to grow their land and/or project portfolio.
However, the 50 per cent mandate will still place enough restriction on developers to divert funds elsewhere and ensure better completion records.
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