Corporate & Commercial Laws Transformation may instill Corporate Governance in Real Estate Sector

Amiya Nayak | May 2011

Post liberalization policy of 1991, there have been significant changes and growth of all the important sectors in India and especially, Real Estate sector, subsequent to the release of press note (2) by DIPP, Government of India, in the year 2005. Moreover, incessant endeavor of the Government, by way of consolidation, half yearly review, further liberalization etc. of the FDI policy, the aggregate FDI inflows into the real estate sector are recorded at approximately 7.38 per cent of the total inflows till end of January, 2011; and the recent Budget (2011-2012) Speech of Pranab Mukherjee, MoF, GoI, w.r.t the further liberalization of the existing scheme of interest subvention, enhancement of existing housing loan limit, etc., may augment the FDI inflows to double digit. Thus, it is quite clear that government is taking every possible initiative for growth of the Real Estate sector. However, in the process of making policies and announcing packages for the growth of Real Estate sector, one section which is left out is consumer/allottee, who should be the ultimate beneficiary, whereas in reality consumer/allotte is the most vulnerable section. Ironically, housing construction comes under the purview of the Consumer Protection Act, in the year 1993, post Supreme Court judgment in the matter of Lucknow Development Authority Vs. M.K. Gupta.

It is being increasingly recognized that the framework for regulation of corporate entities in real estate sector has to be in tune with the emerging economic scenario, for encouraging corporate governance and protecting the interests of the allottees/consumers. Laws are the tool kits to drive the Corporate Governance. There are codified laws like Companies Act, FEMA, Contract Act, SARFAESI Act, etc. protecting interest of other stakeholders but not the consumers, whose interests are not adequately protected. Interestingly, the Parliament is yet to pass the “Real Estate (Regulation of Development) Act”, whose draft model was prepared by Ministry of Housing & Urban Poverty Alleviation, GOI, in order to promote planned and healthy real estatedevelopment of colonies and apartments with a view to protecting consumer interest on the one hand and facilitating smooth and speedy urban construction on the other.

Some key provisions concerning corporate governance that have been inserted in the proposed draft Model Real Estate (Regulation of Development) Act are:

Mandatory Registration of the project

Projects for development of land more than 1000 Sq. mtr. or construction of more than four apartments need to be registered with the Regulatory Authority established under the Act; and the registration will be valid for a period of three years and not more than two yearly renewals can be granted.

Abundant Disclosure

The promoter is obliged to disclose details of sanction, registration, enterprise details, nature of his title to the land on which the project is developed, even required sanction and details of agents, middlemen and architects.
Advertising or issue of prospectus cannot be done without registration and all the information disclosed in the prospectus should be true, and the promoter is responsible for the veracity of the information in the prospectus and is liable to compensate any person who suffers loss due to false information.
The Regulatory Authority can upon complaint or Suo-moto order in writing the cancellation of the registration of a project and display such names in the website of the authority

Establishment of “Real Estate Appellate Tribunal”

Appellate Tribunal will be constituted to dispose of appeals from the Regulatory authority, within 90 days of the receipt of such appeal.

Termination of Registration

Upon cancellation of the registration, the Regulatory Authority can debar the Promoter from accessing its website, enforce bank guarantee, direct the Promoter to transfer the land/title to the allottee within a specified time.

Obligation of the promoter

The Promoter will have to furnish a bank guarantee of 5% of the estimated cost of the project (authenticated by a practicing CA) to the Competent Authority (Urban Development Authority, Town planning Authority etc.) which shall not be discharged without the recommendation of the Regulatory Authority.
Any changes in the approved/ discussed plan would require the consent of the Regulatory Authority and the allottee.
No financial transaction/advance can be taken from the allottee(s) prior to entering into a registered agreement of sale; and agreement of sale has to comply with the provisions of schedule I of the Act.

Although, the Act is still in its draft stage, it most certainly has the potential to be instrumental in regulating one of the most unregulated and attention needy sectors of the country’s economy. However, in the context of numerous instances of corruption, malpractices and administrative red-tapism, the big question seems to be “How effective is the regulator going to be?” which of course will only be answered once the Act comes into effect.

About Author

Amiya Nayak

Amiya Ranjan Nayak is a Partner with Kaden Boriss, Legal and Business Strategists. As a Corporate and Commercial Lawyer, he handles Regulatory, Advisory, Compliance & Documentation services pertaining to Real Estate laws like due-diligence, development, acquisition, disposition, leasing, financing, zoning and land use, etc. besides the services relating to Corporate, Commercial and Cross boarder investment laws.