But it is difficult to rectify the errors of the past and make them conform to laws retrospectively. This is especially so when the money meant for the projects had either been used for other purposes or syphoned out to fulfil the greed of developers, bankers, and speculators. Costs had escalated in the decade or so because of the delay. But the focus has now shifted back to completion and handover.
A raft of regulations aimed at cleaning up the real estate business were promised. With tens of thousands of consumers stranded in limbo, unable to obtain the homes for which they had paid up to 90% of the purchase price, a consumer protection statute was critical. In 2016, a project that had been in the works for nearly a decade began to take shape. The Real Estate Regulation and Development Act was the name of the law (RERA). Unlike regulators in other industries, this one had to adhere to the constitutional requirement of land ownership. Because land is a state topic, each state was required to notify its own law, which had regional variations. Regulators had to be appointed at the state level as well. After national and state laws were effective, the law established district RERA courts to ensure that consumers were protected.
The new law solved the execution problems of projects. Now money had to be collected from consumers in construction-linked plans. It went into a project escrow account and 70 percent of funds were to be used for construction. Only 30 percent could be withdrawn by developers towards the cost of land. Buyers showed their confidence and purchases started. Also with the regulation becoming the norm, serious developers started completing their projects and end-users stepped out to buy these ready units, especially after the Covid-induced lockdowns.
Every real estate project had to be registered with the state RERA authority. This created an initial disruption as the details asked for were never in the balance sheets. The industry was transitioning from unstructured to structured formats and the consumer had to wait for this to happen. Even though there was a model central law, there was no model site and every state had to create its own, with varying degrees of success.
Developers were given the opportunity to post new dates of completion, up to four years from the date of posting. For consumers who had already waited for over a decade, this seemed an injustice. The RERA courts were flooded with consumer complaints about completion dates and the mismatch between the one on the Builder-Buyer Agreements and that listed on the RERA sites. Promised late payment fees were also challenged in courts and clogged them. Even when orders were passed, execution was tardy.
The RERA authorities had the right to listen to consumer complaints and pass orders. However, the authority to execute was not given to them. They were dependent on already overworked district magistrates and, despite fair assessments by the RERA regulators, consumers lost faith in the act when orders could not be executed. The execution arms of the government — municipal authorities dealing with land — were excluded from reporting to the RERA authorities. Since these local authorities had a major hand in the follies of the past, they could not be brought under the purview of the law automatically.
Lawmakers could not provide the RERA with exclusive jurisdiction over the real estate domain. While it superseded the earlier Apartments Act and the Contracts Act, the new Insolvency & Bankruptcy Code (IBC) played havoc with the RERA. In its original form, the IBC was to be invoked by secured creditors. Home buyers were last in the structured waterfall system. But when the collective investment of home buyers in Jaypee Infrastructure Limited was found to be more than that of the secured lenders, home buyers were given the status of secured creditors. Now they too could invoke the IBC against developer default. In many cases, such as Sare Gurugram, 3C and others, even as the RERA courts were trying to resolve the issues, the case went to the National Company Law Tribunals (NCLT).
The RERA was a law aimed at completing the project and handing it over to home buyers. The NCLT did not function at the project level but at the entity level. Its modus operandi was to get an Interim Resolution Professional (IRP), often a chartered accountant or a lawyer, to get the collective entity going as a concern. If it did not work, the entity would be wound up. But the volumes of buyers in different projects of the same entity could not come to a resolution and no significant success has emerged from the NCLT stables. Also real estate is a complex business and IRPs have often not been able to manage the complexities of making the business a running concern again.
The main problem came when in a landmark judgement in the Pioneer Urban case, Justice Rohinton Nariman declared that when there was a conflict between the RERA and the IBC, the latter would take precedence as it was a newer law. To strengthen the RERA and make it the de facto regulator, the government needs to make changes to give execution powers and precedence to the RERA itself, something that many regulators have been asking for. Taking into consideration the large number of unhappy and sometimes destitute home buyers, the central government has created the Special Window for Affordable and Mid-Income Housing (SWAMIH) — a Category II Alternative Investment Fund to complete stuck real estate projects, which still have the potential to draw enough funds either as unsold stock or consumer receivables. This has been the most successful of all schemes to clear up the legacy problems of real estate. After due diligence, a project fund is set up, and all receivables come into it. Payments are made to vendors and contractors directly by Swamih and enough funds are infused to complete the entire project at the earliest. As construction proceeds, receivables come in and the completed, unsold units are sold in the open market to fetch more money to complete the projects. This arrangement has, so far, completed over 9,000 homes and expects to deliver over 12,000 homes every year.
Swamih has completely exited the first project Rivali Park in Borivili in Mumbai. SWAMIH has also sanctioned Rs 650 crore for six Amrapali projects. This is a unique instance where the Supreme Court of India has appointed a court receiver to ensure the completion of projects that would provide relief to over 40,000 buyers in various Amrapali projects. Acts such as the Benami Transactions Act, and the Goods and Services Act, and the demonetisation drive had provided many opportunities to clean up the sector, which has often been referred to as the last bastion of structured black money. However, all this points to the fact that an industry that needed vast amounts of long-term capital, was left unregulated and without access to formal finance for decades. Private equity funds, structured debt, unchecked loans by scheduled banks and non-banking financial institutions (NBFCs), with dubious assets as collateral, all show that the sector is far from formalised. With RERA registration, a lot of consumer confidence has returned. The legacy of the past will still take a while to clear up. But it is imperative that discussions around finance to fund these assets have to begin now if India’s urbanisation has to take place efficiently.
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