The Real Estate Regulatory Authority (RERA) was brought in to crack the whip on dodgy builders taking unsuspecting homebuyers for a ride. The results are mixed
In March, 2016, Parliament voted into law the Real Estate (Regulation and Development) Act—RERA—a legislation that held out the promise of placing consumers at the centre of a new rules-based framework for India’s property market.
RERA, midwifed by two governments—UPA II and the NDA II—between 2009 and the 2016, was necessitated by the growing misery of tens of thousands of harried homebuyers.
Unsuspecting individual customers often complained about getting the short end of the stick, as many builders, some dodgy and some reputed, exploited regulatory gaps by not delivering promised apartments on time or reneging on size and quality, or sometimes, simply vanishing after collecting funds.
RERA’s primary purpose, apart from defining rules, was to build trust among buyers and builders in a market where opaque deals thriving in grey payment systems operating outside the legitimate financial system had become commonplace.
For instance, customers would often find that the actual size of an apartment would be about 30% smaller than what was originally promised. The reason: “super built up area”, an arbitrary concept that builders used to charge customers for shared spaces such as common passage area, stairs and other areas.
Fund diversion had become a rampant practice in the realty sector. Many builders, large and small, would collect money from consumers for apartments, a part of which would then be channeled to buy land for another project. The net effect: never-ending project delays. This was going on without any checks and balances, and builders had developed the `consumers- be-damned’ attitude. For the banking sector too lending to realty projects became a risky proposition, as project delays resulted in mounting loan defaults.
RERA was brought in to address these. Three years later, experts reckon, the results, at best, are mixed.
Under RERA, builders are required to disclose details of “carpet area”, which is the actual apartment’s size, design, structure, layout, time of completion and other project specifications well in advance.
The rules make it mandatory for any project exceeding 500 square metres with eight or more apartments to register with a state’s real estate regulatory authority (RERA) before launching or even advertising a housing scheme.
Registration of real estate agents or brokers have also been made mandatory with clear responsibilities and functions. The punitive provisions include de-registration of the project. If the builder defaults on promises made at the time of the launch, the buyer can approach consumer fora in case of disputes with real estate developers. The penal measures were aimed at serving as a deterrent for builders to short change customers and ensure timely project delivery.
It is also now mandatory for builders to park 70% of funds collected from buyers in an escrow account, implying that these funds can only be withdrawn for the specific project for which these were collected.
Under the central law, each state was required to set up its own RERA that can draw upon central rules applicable in union territories.
Maharashtra was the first off the block with MahaRera in May 2017, with other states soon following suit with their own institutions.
MORE THAN A REGISTERING BODY
RERA’s role is not limited to just as a registering agency for realty projects, but was designed to evolve into a body empowered to even complete stuck projects or even allow buyers’ groups to take over unfinished projects.
Three years later, experts say, RERA’s record on this front remains below par. The RERA Act’s Section 8 empowers the authority, buyers’ association or an appropriate government organisation to execute unfinished projects, but arranging funds and buyers’ cooperation remain a critical challenge.
The Amrapali Group, which has unfinished projects peppered across Noida and Greater Noida, is a case in point. The Supreme Court, which which is hearing a batch of pleas of 42,000 home buyers against the embattled group for failing to give the possession of flats, had asked the Noida and Greater Noida Authorities whether they will be able to complete the projects. The authorities responded that they did not have the capability to handle projects of such big scale, but suggested that perhaps UP RERA could take these up.
“While it (UP RERA) certainly cannot complete projects by itself, it can find appropriate solutions by approaching competent authorities or even appoint a project management consultant to finish these,” said Kumar Mihir, lawyer, representing Amrapali homebuyers.
Sound as it may appear on paper, in practice, however, too many instances of leaks in builders’ escrow accounts have come to light.
“The problem in most cases has arisen not because of shortage of funds but because monies collected from homebuyers have been siphoned off. This is because builders have exploited gaps in RERA rules of some states. For instance, the Uttar Pradesh RERA rules do not mandate parking funds in an escrow account for projects that started before May 1, 2017. Had it applied to all ongoing projects before May 1, 2017 the funding for most of the incomplete RERA projects would have been sorted,” said a lawyer who did not wish to be identified.
The RERA rules framed for the union territories had categorically stated that promoters of ongoing projects are required to set aside 70% of funds collected for specific project in a separate escrow account.
Some states such as Uttarakhand, Orissa and Bihar have adopted the central RERA rules. Maharashtra and Gujarat rules stipulate that only 70 percent of funds collected in the future, after May 01, 2017, have to be kept aside in an escrow account. The Uttar Pradesh RERA rules are silent, which builders have taken advantage of to siphon off funds.
BUYERS AS BUILDERS
Exasperated buyers are now beginning to come forward to turn builders themselves. RERA rules allow this and the few cases, if successfully tested, can well serve as the proof of concept for this model.
The Maharashtra real estate regulator has already come with a standard operating procedure (SOP) that allowed homebuyers to remove a developer in case the project is not completed on time.
The SOP allows a homebuyers’ association that enjoys the backing of at least 51 percent of its members to remove the developer from a much-delayed project. It even empowers the association to even cancel the developer’s registration under the MahaRERA Act.
Last year, the UP RERA decided to consider a proposal by defrauded homebuyers to take over and complete a project in Noida that had been delayed by several years.
“Prima facie, this appears to be an excellent move and will also set a very good precedent. But, it is also very important to know (a) how the project will be funded and (b) if the builder has taken more money than what work has been done by him and how RERA plans to recover the excess money from him,” said Abhay Upadhyay, President, Forum For People's Collective Efforts.
Experts, however, sounded a caveat. Authorities taking over incomplete projects should be an exception, rather than a norm because under RERA a builder should adhere to the rules, with strict penalties for violation. Also, it may be difficult for RERA to undertake a project from scratch.
“Doing something from scratch is very difficult. We will not advise it. It all depends on the size of the project and should be taken up on a case-to-case basis. It is not something that can be applied across the board,” said a lawyer who did not wish to be identified.
CRISIS OF CONFIDENCE
RERA’s institutionalisation was predicated upon customer centricity. The state bodies were expected to play the role of a strict referee that would instill the fear of law among deceitful builders.
Three years later, customers say, the job remains half done. The two main issues that homebuyers face today are to do with lack of confidence about execution of RERA orders by realty companies, and multiple forums for grievance redressal.
A mere RERA registration does not guarantee that a project will be delivered on time. An under-construction project, therefore, continues to remain a risky bet despite RERA.
“This is because RERA authorities are not taking proactive steps to ensure that all provisions are being complied with by the builder, nor are they monitoring the progress of the projects. They should ensure that projects are granted extension only under exceptional circumstances”, said Upadhyay, president of Fight for RERA, an umbrella body of homebuyers.
There are also instances where realty companies have given different timelines to homebuyers and the authority. “A builder cannot change timelines. At best, he can only ask for a one year extension from the regulatory authority. If the builder changes timelines he is liabile to pay penalty. Authorities should be on their toes to address the issue,” said lawyer quoted earlier.
What is needed are speedier clearances and cutting down of bureaucratic red tape.
“The government should expedite a single window clearance mechanism for the real estate sector. The clearance and approval process for residential real estate projects has been an impediment for a long time. After RERA was launched, it became all the more important to facilitate smooth clearances and approvals so that there are no execution delays due to procedural hindrances,” said Amit Ruparel, managing director, Ruparel Realty.
Most contracts with homebuyers were changed after RERA came into effect from May 1, 2017. This has complicated timeline commitments.
“For most projects those timelines are almost ending. It is for RERA authorities to now start mapping those projects to see if there are delays and to start sending out show cause notices to developers. RERA’s job is not merely to register a project but also to map the projects and ensure that their timelines are being met,” said the lawyer who did not wish to be identified.
That said, the process is evolving in the right direction, albeit slowly, expert said.
“Things are changing for the better. Generally, players are far more accountable and cannot easily get away with breaking the RERA rules. While the redressal of complaints is not satisfactory for many, consumers are coming forward in large numbers to register complaints across states. The Wild West days of Indian real estate are definitely over”, says Anuj Puri, chairman, ANAROCK Property Consultants.
Project and real estate agent registrations have been rising steadily. For instance, in Andhra Pradesh as many as 307 projects were registered under RERA as on date, a five-fold increase from 61 in November 2018.
Maharashtra is currently the most active state having the highest project registrations with more than 20,718 projects under MahaRERA so far, and nearly 19,699 RERA-registered real estate agents.
Project registration in Karnataka currently stands at 2530 projects and 1342 RERA-registered real estate agents, says data shared by ANAROCK.
Gujarat has 5,317 RERA-registered projects and 899 registered agents and agencies.
“RERA, accompanied by reduced GST rates, has helped in bringing back consumer confidence and the trust factor which the industry lacked,” said Rahul Grover, president, Sales and Operations at Sai Estate Consultants.(This is part of a series of pieces on issues plaguing the real estate sector)Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.