The cabinet of the Government of India chaired by the Prime Minister has approved the changes suggested by the Select Committee of the Upper House (i.e. the Rajya Sabha) of the Parliament to the Real Estate (Regulation and Development Bill), 2015 (“Bill”). The Bill now is slated to be introduced in the current budget session of the Parliament for its consideration and passing. The Bill seeks to provide the much necessitated regulations to the developers/ promoters to follow and in a way a relief to the home buyers. At present there is no authority/ body to regulate the real estate sector and it is the need of the hour to have a regulator in place which will provide for protection of the buyers/ customers and regulations for the developers/ promoters to comply with. The Bill empowers the state government to set up a real estate regulatory authority (“Authority”). The Authority shall consist of a chairperson and 2(two) whole time members. A real estate project having a land area of more than 500 (five hundred) square meters, or the number of apartments exceeding 8 (eight), cannot be advertised, marketed or sold by a promoter unless such project has been registered with the Authority. The Bill also provides that in case of a project which may have commenced prior to the coming of the act into force (the Bill will become an Act once it is duly passed by the Parliament and have completed other formal process including notification in the Government Gazette), the promoter shall have to make an application to register the project within 3(three) months from the commencement of the act. In case of any contravention of requirement of obtaining registration, the promoter shall be liable to a penalty which may extend upto 10% (ten percent) of the estimated cost of project, and in case of a continuing violation, the promoter can be imprisoned for a term which may extend upto 3 (three) years, or fine, or with both. The Authority also has the power to revoke the registration of the project in case of (i) any contravention by the promoter in complying with the Act, (ii) violation of the terms and condition of approvals granted by the competent authority, (iii) in case the promoter is involved in unfair trade practices. Arguably, most of the real estate developers (there are always exceptions) need to be disciplined for their development and construction deliveries vis-à-vis their commitments to customers; and the Bill proposes to achieve such discipline.

The Bill also mandates the registration of real estate agents who will be involved in facilitating the sale and purchase of the project registered under the Act. The Act casts an obligation on the real estate agent to not facilitate the sale and purchase of a project which is not registered with the Authority.

The promoter of the projects registered with the Authority shall have to create a webpage on the website of the Authority and shall have to provide vital information with respect to its project such as quarterly upto date list of approvals taken, quarterly upto date status of the project etc. It can be seen from the aforesaid provisions of the Bill that the Bill seeks to provide a mechanism for governance of the real estate projects since its inception. Also, the Bill seeks to ensure that the public at large remains informed about the project, status of construction and other important aspects with respect to the project and can make an informed decision while buying a home. The Bill also requires that 50% (fifty percent) or such higher amount, as may be notified by the appropriate government, of the amount realized from the allottees, from time to time, to be deposited in a separate account maintained in a scheduled bank to cover the cost of the construction, and the amount lying in such account shall only be used for the construction of the project. This rule is certainly beneficial for the consumers and the promoters too; since while having made minimum commitments to the project, the promoters can still utilize the remaining 50% (fifty percent)of the cash flows for buying land for other projects or for some other purposes other than the construction of the current project. There have been several debates on the quantum of this percentage, nonetheless this requirement of maintaining the amounts in a separate bank account will inculcate some discipline in the developers/ promoters. This percentage should have been at-least 75% (seventy five percent) to ensure that project cash flows/ funds of a project are spent for the same project; and there remains an incentive for the developers/ promoters to complete the project and seek usage of the surpluses of the project for other purposes. Although, it is yet to be seen as to how this requirement will be synchronised with local licensing requirements of states where developers/ colonizers are required to deposit certain percentages into a separate bank account for the purposes of the construction (e.g. 30% (thirty percent) in Haryana).

Further, the Authority has the power to freeze the project bank account and to take necessary action for de-freezing of the account in order to facilitate the remaining development works for the project, in case of revocation of registration of the project. It may be important to see the actual enforcement of such provision by the Authority. Further, it also needs to be examined as to whether the requirement of maintaining this amount will be applicable in cases of projects which may have already commenced prior to coming of the Act in force. Further, as per the Bill, a promoter cannot accept a sum of more than 10% (ten percent) of the cost of the apartment, plot or building as the case may be, as an advance payment or application fees without entering into a written agreement for sale and registering the same. Further, the Bill provides that in case, a person makes an advance or deposit on the basis of information contained in the notice/advertisement/ prospectus or on the basis any model apartment, plot or building as the case may be, and sustains any loss or damage by the reason of any incorrect, false statement included therein, then such person is liable to be compensated by the promoter and in case such person wishes to withdraw from the project, such customer shall be returned the entire investment along with such rate of interest as may be prescribed and the compensation. These provisions of the Bill at least scare the promoters who are in habit of changing the specification of the project during the construction stage of the project. This provision will also make the promoters think twice before making any fictitious representation with respect to their projects. One of the provisions in the Bill provides that the promoter shall not transfer or assign its majority rights and liabilities in respect of the real estate project without obtaining written consent of two-thirds of the allottees and without the prior written consent of the authority. It is important to examine this provision in greater depth to ascertain if the change in shareholding of the entity developing the project or hypothecation/mortgage of assets forming part of the project for raising construction finance for the project will constitute a transfer or assignment of rights or not.

The Bill is a welcoming step towards protection of the interest of the buyers, however the important issues such obtaining clearance for the project, lengthy and arduous process of project approvals, clear land titles are still left unanswered, without which there may not be any project for the buyers to buy into. The Bill is also welcoming by the developers/ promoters, since now they would know as to what they should be following for development/ construction of the projects and there will be serious players who will remain in the business for a longer time. It may be important to experience as to whether how soon after coming of the Act in force the state governments establish the Authority in their respective states to enforce the provisions of the Act and whether the Act will be able to stand the test of time.