Saturday, November 12, 2011

Draft Real Estate Regulation Bill to Bring in Transparency

The bill proposes to strike a balance between encouraging regulated growth and development as well bringing in more accountability in the sector

              In a move that will depress the top line of several leading real estate companies, an upcoming accounting change aims to reduce the discretion available to them on how to compute revenues. The accounting regulator is working on a ‘guidance note’ that will, for the first time, define when and how developers should recognise revenues from a project, say two senior officials of the Institute of Chartered Accountants of India (ICAI) working on the note, on the condition of anonymity. The new rules will be a blow to companies that adopt an aggressive tack in recognising revenues, including frontline ones like DLF and Parsvnath Developers. In the case of DLF, for example, the proposed change would have placed in question 75% of the revenues declared by India’s largest developer in 2010-11. For Parsvnath, that figure would be 79%.
              Builders will have to register themselves before launching housing projects, stick to the approved plans and refund money to homebuyers in case they default, after the government brings in a new law aimed at bringing in more accountability and transparency in land and home transactions.
              The Real Estate (Regulation and Development) Bill, 2011, which is expected to be tabled in Parliament during the upcoming winter session, will also pave the way for the setting up of the Real Estate Regulatory Authority, an industry watchdog that will keep a lease on land sharks and fly-by-night operators. Union minister for housing and urban poverty alleviation, Kumari Selja, on Friday unveiled a new draft bill for public consultation.
              The draft has also recommended that builders set up a separate escrow account to compulsorily deposit 70% of the funds received from buyers and to ensure that these funds are used for that real estate project only. An earlier draft had proposed that the developers would submit bank guarantees.
              The draft has also said that the promoters will be obliged to stick to the approved plans and project specifications and provide all information to the buyers who have booked apartments, which includes site plans along with structural designs and specifications. The builders, who intend to sell any immovable property, will have to register with the Real Estate Regulatory Authority for accreditation, except for when the area of the land being developed does not exceed 4,000 sq mt. But the developer will have to make an application to the authority disclosing details about the project, including land status, approvals and contractual obligations for the registration process. No builder will be allowed to issue or publish an advertisement or prospectus or start booking of flats in a project without obtaining registration from the authority.
              The builders will also have to refund moneys in cases of default. “If the developer willfully fails to comply with the norms they shall be punishable with imprisonment for a term of up to three years or a penalty which may extend to a tenth of the estimated cost of the real estate project, or both,” the bill says.
              Builders have been up in arms against the imprisonment clause and have said
             it can be misused and heavy financial penalty is more than enough. “The bill aims at restoring confidence of the general public in the real estate sector and ensure transparency, disclosure and accountability in the real estate sector,” said Selja. She said that the bill proposes to strike a balance between encouraging regulated growth and development as well bringing in more accountability in the sector.
              The draft has proposed the formation of a nodal agency called the Real Estate Regulatory Authority in each state to co-ordinate efforts regarding development of the real estate sector and offer necessary advice to the state governments and centre for a “transparent, efficient and competitive real estate sector.” The authority will also establish dispute resolution mechanisms for settling disputes between developers and buyers.
              The draft has recommended that the buyer will also be obliged to make necessary payments and other charges as agreed to under the agreement and payment of interest in case of any delay.