Scam Hit Indian Real Estate Sector in Acute Need of Regulation

The year 2010 will probably go down in India’s history as the year of scams. As always, the authorities swing into action after the event. Regulations and compliances notwithstanding, scamsters continue to devise and leverage the loopholes. Unregulated sectors, such as real estate, which is in acute need of regulation, probably demonstrate best the investors’ predicament. The real estate sector probably has the highest rate and volume of investments and the largest number of investors. Contrasted with the various SEBI regulations which aim to protect the capital market investors, real estate development regulation has been sadly neglected, though there is a draft Bill on the anvil.

Currently, the Indian promoter-developer buys the land from villagers and “obtains” clearances from the competent authorities for the building and layout plans. The predevelopment clearances required range from non-agricultural orders by way of Government permissions for the proper use, as for example conversion of land earmarked for agricultural purposes only. Building and Floor plans are approved by local municipal or state urban development authorities, depending on location. In addition, a no-objection certificates are to be obtained notably from the state pollution boards, water supply and sewerage authorities, properties and respective state and central authorities such as the Archaeological and Airport bodies in order to rule out attendant risks the development may pose to the existing structures and operations.

In practice, these approvals are taken at a much later point of time. Because of the tight demand and supply situation, booking and collection of a large chunk of consideration from prospective buyers are concluded well before these clearances are obtained. The buyers have no choice but to sign on the standard contract formats, without the right to negotiate, leaving customers and investors to the mercy of unscrupulous promoters and subjected to various unfair trade practices, with cavalier disregard for compliances. The contracts which the buyer is induced to execute have clauses which are onerous and one-sided, with loopholes for the developer to get away with delays, random cost escalations, exorbitant penal interest, to name a few. The Developers ensure that they are fully insulated from all future liabilities, which are passed on to the buyers at a later point of time, when they become aware that their rights to ownership, super areas, common areas and facilities are very different from what was represented.

The buyers’ recourse so far has been to the Consumer Courts. The National Commission in 2007 dismissed DLF”s appeal from the complaint filed by one Kamal Sood to hold that the builders’ practice of collecting money from prospective buyers without obtaining the required permissions amounted to an unfair trade practice, and the builder is dutybound to obtain the requisite permissions in the first instance, and thereafter, recover from the buyer. It further held that if there is any express promise that the premises would be delivered within a stipulated time-frame, the builder has to bear the escalation costs. Even then the developer’s deep pockets, and rounds of appeals are often a deterent for mostinvestors.