Why implementation of RERA has fallen short of expectations
Despite creating significant growth, the Indian real estate sector has been largely unregulated. Absence of professionalism, lack of standardisation, delay in delivery and lack of adequate consumer protection remained prevalent in the sector. Although the Consumer Protection Act, 1986 was and still is available as a platform, the recourse generally is restrictive and inadequate to address all types of real estate concerns, as shown by the past experiences.
Therefore, the need for regulating the sector has been emphasised time and again by stakeholders, and that clamour had finally culminated into enactment of the Real Estate (Regulation and Development) Act (RERA) on March 2016.
Most of the states have either enacted state versions of RERA or are in the process of drafting and notifying since the onus of implementation largely is on the state governments. However, it seems that the road to effective implementation is fraught with serious difficulties.
Dilution of central provisions in state-enacted laws
There have been rampant dilution of provisions of central legislation in state-enacted laws. For example, the central legislation clearly includes all projects that are ongoing on the date of commencement of the Act (May 1, 2017), and for which the completion certificate has not been issued. However, quite a few states, including Andhra Pradesh, Chhattisgarh, Karnataka, Kerala, Tamil Nadu, Telangana and Uttar Pradesh, diluted the definition of ongoing projects by introducing exceptions.
Similarly, the RERA recommends imprisonment for a term, extendable up to three years, or fine which may go up to 10 per cent of the estimated cost of the real estate project, or both, in case of non-compliance — for developer, real estate agent and buyer. But, except for Kerala all other states and union territories have added a clause of compounding of offence to avoid imprisonment.
A comparative study of the state laws with the central legislation confirms this tendency to dilute central provisions like norm for escrow account withdrawal and defect liability, in most of the subsequent state laws. This tendency seems to be due to the influences exerted by various pressure groups with vested interests at ground level.
Issue of centre-state jurisdictional gap
Before RERA, state governments regulated real estate as land and land improvement are in the State List of Seventh Schedule of the Constitution, under Entry 18. With RERA situation has changed as the Central Act will prevail over State Legislations in case of any discrepancy or conflict. Precisely for this reason, there has been an intense debate about RERA, with some arguing that it is a case of legislative overreach by the Centre in the states’ domain.
To counter that, central government policymakers argued that this Act is to regulate transactions in the real estate sector and is in pursuance of the powers under entries 6, 7 and 46 of the Concurrent List of the Constitution, which deal with transfer of property, registration of deeds and documents, and contracts. Also, finally the regulatory bodies will be operating at the state level itself and the states will have enough freedom to make and constitute their regulatory bodies through state-legislated RERA rules and amendments. If achievement of consumer protection and standardisation of the sector are the final goals then, it is argued, the issue of conflict in jurisdiction between the centre and the state ideally should not arise.
However, since historically land has been a volatile and highly controversial subject any future conflict may ultimately drag issues to the legal arena where this centre-state jurisdictional gap may be utilised to score points.
Concerns of effects of bankruptcy on RERA
Some recent legal developments highlight the problem of builders declaring bankruptcy in ongoing projects. Being the “unsecured creditors”, homebuyers apprehend that their rights may get violated as the central legislation of RERA does not mention “bankruptcy” at all.
Under the current form of Insolvency and Bankruptcy Code (IBC) the homebuyers are treated as “unsecured creditors”, and therefore lower in the settlement priority in case of a bankruptcy. The conflict between IBC and RERA came to the fore in quite a few bankruptcy proceeding in the recent times.
For example, the NCLT Allahabad had earlier initiated insolvency proceedings against Jaypee Infratech at the legal insistence of its financier IDBI. Few homebuyers filed a PIL in Supreme Court, and the court initially stayed the insolvency proceedings but subsequently vacated it and appointed an amicus to “espouse the cause of the homebuyers and protect their interests” during creditor meetings.
This case highlighted the specific conundrum that these two acts pose in the current form. While the IBC was passed with the intention to smoothen the process of “closing the business”, RERA has been implemented to “regulate and formalise the real estate sector”. But, in case of insolvency, while one tries to give primacy to the creditors the other tries to put consumers before creditors in the current forms.
However, on May 23, 2018, the Union cabinet reportedly has cleared an ordinance to amend the IBC to treat homebuyers on a par with institutional financial creditors during bankruptcy proceedings. This is a step in the right direction to uphold the spirit of RERA to ensure consumer protection. Although the detailed legal status of the homebuyers in the creditors’ categories will be known once the ordinance is promulgated, adopting a proportional approach to settle and reimburse creditors’ accounts by including homebuyers in case of liquidation can be an effective element in the amendment.
It will be interesting to see the institutional creditors’ reaction, particularly banks, but the move may go a long way to protect the homebuyers’ interest in future.
(This article was originally published by the Observer Research Foundation, New Delhi. The original version can be found here. )