Indian Government’s Move to Encourage Private Participation in Infrastructure

According to various studies undertaken on the infrastructure sector in India, in many cases where the award is made against government bodies, the government sector would inevitably challenge the award, and the private player would inevitably have to await not only the arbitration process, but also the entire challenge process. According to the available data, over 85% of the claims raised against the Government bodies are still pending of which 11% is pending with the Government agencies, 64% with the arbitrators and 8.5% with the Courts. An amount of nearly Rs. 3,400 crore is the awarded dues and another Rs. 4,500 is still under arbitration. No wonder the report commissioned by the CII indicates pointed out that the pending claims from government bodies are the key factor behind burgeoning debt of construction companies, accounting for about 150 % of the debt.

However, the Government of India has decided to change all this to encourage private participation in infrastructure and improve the overall condition of Infrastructure in the country.

On 31st August, 2016, the Cabinet Committee on Economic Affairs, chaired by Mr. Narendra Modi, Hon’ble Prime Minister of India, approved various measures to revive the construction sector[1]. The decision was taken in the backdrop of the constant stress that the sector has been undergoing. According to the decision, in cases where the award is made against any Government agency or a Public sector undertaking, and the agency is challenging the award, it will have to pay 75 per cent of the amount of the award in an escrow account against margin free bank guarantee. This escrow account will thereby be used to repay bank loans or to meet commitments in ongoing projects. The measures will strengthen the ailing construction sector.

The benefits of this step are manifold. There is expected to be a drastic increase in the employment opportunities, for the construction sector, which is the largest sector of direct and indirect employment. Moreover, the projects which had to be halted, for the want of funds, will be able to resume the construction. The regime will, thereby, ensure that the contractor does not suffer once the dispute is resolved by arbitration. The average time settlement of claims is estimated to be more than seven years, and a majority of arbitration awards are given against the Government agencies. Therefore, the step will ensure the loss of time and blockage of capital and material is avoided.

It is also likely to benefit the banking sector. Once the projects get restarted, the companies would begin to repay the interests and the principal dues, thereby, the books of the banks are expected to improve, however the improvement will be gradual. Currently, the exposure of financial service sector on the construction is more than of Rs. 3 lakh crore, out of which 45 % are under stress. Therefore, there is expectation of increase in liquidity of financial service sector.

Several other measures have also been introduced. One of them is that in all new contracts, there would be a provision for conciliation board, which will comprise of independent subject experts. This has been included to ensure that there will be a contractual mechanism for renegotiations without bringing projects to a standstill, when public servants are reluctant to participate in the renegotiations on changes in commercial circumstances. Moreover, it will promote a cheaper and less time-taking mechanism of dispute resolution. Further, the contractors have also been provided with an option of shifting their pending disputes with government bodies, to the new arbitration procedures, from the old Arbitration Act. This will provide them with the opportunity of utilizing the cheaper and fast track arbitral process, as introduced by the recent amendment.

The construction companies are expecting an immediate benefit out of the regime. So far the implementation seems to be a success. Government bodies seem to be already acting on these initiatives. On 23rd March, 2017, ONGC issued a Protocol for the implementation of the Niti Aayog’s initiative for the revival of construction sector, as approved by its Board on 31st January’17 in the 289th meeting[2]. It laid down comprehensive guidelines for complying with the regime. With a total of around 597 cases pending, under arbitration proceedings or pending before the court, in respect of PSUs, this step was most welcomed. With the co-operation of PSUs like ONGC, the implementation seems to be proceeding at a decent rate. The regime has received a positive response in the market and is expected to divulge outcomes within 2-3 years.

With all these measures in place, India would definitely become a much more attractive investment option for the private players as far as the infrastructure sector is concerned.

(The author would like to thank Gunjan Chhabra, Senior Associate of the firm for the valuable assistance in researching for this article.)

[1] Press note released by Press information Bureau, 31st August, 2016, available at:[2] Available at:

The Real Estate (Regulation And Development) Act, 2016 – A Game Changer?

What was the need for a new Act?

The Real Estate and Housing sector was, until very recently, in a state of flux. Essentially, in view of the lack of a specialised legislation taking care of the practices of the real estate sector in India, this industry was unregulated, till the introduction of Real Estate (Regulation & Development) Act, 2016. Coupled with this, private players tried to take advantage of this situation which only created more encumbrances for the hapless consumers. Resultantly, consumers were faced with unfair, discriminatory and lopsided contracts whereby they had little option but to sign on the dotted lines. Additionally, they were at the complete mercy of the private players who had an unreasonable amount of control in the relationship, whereby there was a conspicuous absence of competition in the market, giving the benefit of negotiation to the builders. Besides, there was often incomplete and inadequate information compounded by an ineffective mechanism to hold the private players accountable for engaging in such unreasonable and unfair practices

The New Act-: A reason to hope

The Act has been lauded because it is a much needed step towards regulating this industry. Perhaps, the biggest reason behind passing of this Act is to create an effective redressal mechanism to promote greater transparency and accountability in the real estate and housing sector. Some of the most important provisions laid down in the Act, which can truly prove to be a game changer are as follows:

  1. Establishment of “Real Estate Regulatory Authority” (RERA) for monitoring the real estate sector and adjudicating disputes relating to Real Estate Projects;
  2. Registration of Projects with RERA is mandatory before a real estate developer can sell any project/ flat/ housing unit;
  3. Details of the project alongwith necessary approvals have to be maintained on the website of RERA which will increase transparency;
  4. In cases of violation provisions have been made for fine as well as imprisonment;
  5. Any promoter shall not accept a sum more than ten per cent of the cost of the apartment, plot, or building as the case may be, as an advance payment from a buyer without first entering into a written agreement for sale with such person;
  6. It has been made obligatory for the promoters to deposit 70% of the money collected from buyers for a particular project in a separate account;
  7. Both promoter and buyer are liable to pay equal rate of interest in case of any default from either side;
  8. Carpet Area and Common Area have been defined separately;
  9. Where an Offence under this Act has been committed by a company, the Company along with officers responsible of the company;
  10. A fast track dispute resolution mechanism for settlement of real estate disputes through dedicated adjudicating officers and an Appellate Tribunal is also an integral aspect of the Act.

Thus, the Act aims to help the buyers feel protected by law adequately not just from sellers/builder but also brokers, whom it includes in its purview.

Not So Perfect After All?

The drafters believe that the Act is beneficial for all stakeholders and not merely the buyer as it will promote the completion of projects in a timely fashion and boost investors’ confidence in the project developers. However, it is also pertinent to mention that the Act is not without imperfections. The new Act, while laudable, has its share of loopholes that will need to be addressed eventually. Perhaps, the most concerning lacuna is that the Act only covers new projects and the projects where completion certificate is not issued on the date when the Act is notified but fails to include existing projects. The Act also doesn’t make any provision for selling flats/ apartments on carpet area basis, creating scope for manipulation. Lastly, since the Act does not make it mandatory to register projects which are smaller than 500 square meters or has less than 8 apartments a large number of small housing projects which also have great share in the market will remain excluded from the ambit of the Act in its present form.

Nevertheless, the creation of this Act is by itself an extremely encouraging step. The initiation of the Act with the sole objective of protecting the interests of the buyers and promoting transparency in the real estate and housing sector, which was previously plagued with manipulation and discriminatory practices, is in itself a game changer. While the Act is yet to be completely notified, it has already generated a positive response from the consumers. The challenge will now be to ensure effective implementation of this ambitious legislation.

(The author would like to thank Arushi Gupta, Associate of the firm for the valuable assistance in researching for this article.)

The Real Estate (Regulation and Development) Act, 2016 – An Overview

Vikas Goel & Abhishek Kumar


1/12/2016  

Introduction:

Over the past few decades, the demand for housing has increased manifold. Despite Government’s efforts through various schemes, it has not been able to cope up with the increasing demand. Taking advantage of the situation, various private players have taken over the Real Estate Sector, who are completely non-sensitive towards the interests of consumers. Contracts with unfair and one sided conditions have left the consumers helpless and the current existing laws have failed to check the largely unregulated Real Estate and Housing Sector in India. Consequently, consumers are forced to sign on dotted lines with absolutely discriminatory clauses giving the developers unbridled and unreasonable power. Besides, consumers are also unable to procure complete information or even enforce accountability against erring developers in the absence of an effective mechanism. The need for a legislation to regulate Real Estate Sector was felt badly for establishing an effective mechanism to enforce accountability against the Real Estate Sector and providing expeditious adjudication machinery, which ultimately led to passing of “Real Estate (Regulation and Development) Act, 2016”.

The Bill received the assent of the President on 25th March 2016, thus making it a law. It will come into effect on a date to be notified by the Central Government.

The primary purpose of the Act is to restore the confidence of consumers in the Real Estate Sector by introducing transparency and accountability therein. It will also help in accessing the financial and capital markets in the long term goals.

The Real Estate (Regulation and Development) Act, 2016 aims to regulate and promote the real estate sector by regulating the transactions between buyers and promoters of residential as well as commercial projects. It also has provisions for establishing a regulatory authority at state level called “Real Estate Regulatory Authority” (RERA) for monitoring the real estate sector and adjudicating disputes relating to Real Estate Projects. The main aim of the Act is to protect buyers and help investment in Real Estate Sector.

Main Objectives:

  1. enhance transparency and accountability in real estate and housing transactions;
  2. providing uniform regulatory environment to ensure speedy adjudication of disputes and orderly growth of the real estate sector;
  3. boosting domestic and foreign investment in the Real Estate sector;
  4. promote orderly growth through efficient project execution and standardization;
  5. offer single window system of clearance for real estate projects.

Salient Features of the Act:

  1. Establishment and incorporation of Real Estate Regulatory Authority (RERA) at every State in India for monitoring and adjudicating disputes relating to real estate projects (Section 20).
  2. Establishment of fast track dispute resolution mechanism for settlement of real estate disputes through dedicated adjudicating officers and Appellate Tribunal (Section 43 & 44).
  3. Registration of all real estate projects is made mandatory with RERA having territorial jurisdiction over such projects. No sale in a real estate project can be made without registration of the project with RERA (Section 3). RERA can also refuse to register a project, if the same is not compliant with provisions of the Act. Registration of a project can even be cancelled, in case, RERA receives any complaint and the same is found to be correct after inquiry.
  4. It is mandatory for a promoter to upload details of proposed project on the website of RERA, including details of registration, types of apartments or plots booked, list of approvals taken and the approvals which are pending subsequent to commencement certificate, status of the project, sanction plan, layout plan etc. (Section 11).
  5. RERA shall approve or reject the application for registration within 30 days, failing which it shall be deemed to have accepted the application for registration (Section 5).
  6. Any promoter shall not accept a sum more than ten per cent of the cost of the apartment, plot, or building as the case may be, as an advance payment or an application fee, from a buyer without first entering into a written agreement for sale with such person and register the same. (Section 13)
  7. It has been made obligatory for the promoters to deposit 70% of the money collected from buyers for a particular project in a separate account that will cover the cost of land and construction and the same can be withdrawn only after certification from an engineer, an architect and a chartered accountant. [Section 4(2)(l)(D)].
  8. It is now obligatory for all the promoters to obtain insurance in respect of title of the land and buildings and construction of every project. (Section 16).
  9. The promoter shall not transfer or assign his majority rights and liabilities in respect of a real estate project to a third party without obtaining prior written consent from at least 2/3rd no. of allottees, except the promoter, and without the prior written approval of RERA [Section 15(1)].
  10. Both promoter and buyer are liable to pay equal rate of interest in case of any default from either side (Section 2 (za)(i)).
  11. The promoter shall compensate the buyer in case any loss caused to him due to defective title of the land, on which the project is being developed or has been developed, in the manner as provided under this Act, and the claim for compensation under this subsection shall not be barred by limitation provided under any law for the time being in force. (Section 18)
  12. An aggrieved person may file a complaint with RERA, as the case may be, for any violation or contravention of provisions of this Act or rules and regulations made thereunder against any promoter, buyer or real estate agent. (Section 31)
  13. During the pendency of enquiry, RERA can restrain any promoter, buyer or agent from continuing with the act complained of. (Section 36)
  14. A person aggrieved by any direction or decision or order made by RERA or by an adjudicating officer under this Act may prefer an appeal before the Appellate Tribunal having jurisdiction over the matter. (Section 43)
  15. If a promoter continues to violate the provisions of Section 3, he shall be punished with imprisonment for a term which may extend to three years or fine which may extend to ten percent of the estimated cost of the project or both [Section 59(2)].
  16. If a promoter fails to comply with orders or directions of RERA, he shall be liable to a penalty, which may extend up to five percent, of the estimated cost of the project as determined by the Authority (Section 63).
  17. If a promoter fails to comply with the orders or directions of the Appellate Tribunal, he shall be punished with imprisonment for a term which may extend to three years or fine, which may extend up to ten percent of the estimated cost of the project, or with both (Section 64).
  18. Where an Offence under this Act has been committed by a company, every person who, at the time, the offence was committed was in charge of, or was responsible for the conduct of business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished. (Section 69)
  19. No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which RERA or the adjudicating officer or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act. (Section 79).

Conclusion:

The Real Estate Act, 2016 is one robust step towards regulating the highly unregulated real estate sector and bringing more transparency to real estate transactions. It was a long due measure which has now finally been implemented. However, a closer scrutiny of the provisions of the Act would reveal that the Act has certain loopholes, which ought to have been filled while enacting the same and which may make the consumers liable to suffer. Some of such loopholes are as follows:

The Act only covers new projects and the projects where completion certificate is not issued on the date when the Act is notified, but not the existing projects i.e. the projects that are ongoing as on date or where partial completion certificate has been issued, completed immediately before the Act is notified, or stuck as on date for any reason;

  1. The Act doesn’t make any provision for selling flats/ apartments on carpet area basis, leaving a scope for promoters for manipulation;
  2. Under the Act, it is not mandatory to register projects, which are smaller than 500 square meters and 8 apartments. It could lead to the exclusion of a large number of small housing projects, which also have great share in the market.

However, despite the abovementioned loopholes, the Act will benefit both promoters as well as buyers. It is an initiative to protect the interest of consumers, to promote fair play in real estate transactions and to ensure timely execution of projects. With a clear intention of protecting the interests of buyers, the Act helps the consumers to safeguard themselves from any foul play or exploitation by promoters. The legislation is considered to be a game changing step in the real estate sector.