The Real Estate (Regulation and Development) Bill:

The Government plans to have, by year 2022,affordable housing for all citizens.Till date especially in Mumbai, Pune,Bangalore, Delhi and countless other metropolis and developing urban areas, the developers took undue advantage of the buyers even when real estate was already pricey and profitable, information about the builders was not dependable, and there was no way for the consumer to have technical knowledge of construction.

The consumers in the growing real estate market face an acute problem of information asymmetry. They don’t have adequate information about the land itself, its ownership and other caveats. They have no way of knowing whether the developer has all the necessary permissions in place and they have always been cheated about the completion dates even when they end up paying on a timely basis of “slabs”, which makes up for almost 90% of the cost of the flat/real estate. However, banking on this information asymmetry, the developers divert these funds to buy other projects and continue with the same procedure and proceed for a 3^rd project and so on and so forth. By this time, the consumers of the 1^st project are now in aggression over the delay so some funds find their way back to completing this estate.The developer, even though undertaking massive projects in this capital intensive sector, never takes a loan or is never in need of financial assistance because he uses the consumer’s money for rolling which is more than sufficient for him.

On the other hand, if the buyer vets the agreement, it is likely that he will infer that all clauses are in favor of the builder and loaded against him. For instance, a delay in payment empowers the developer to charge you 18%p.a, while there is absolutely no mention whatsoever of any liability on the developer to deliver the estate on time. Forget delivery, even the completion dates are subject to numerous conditions and caveats which nullify any legal backing to the promise of a delivery, even though it is mentioned in the agreement. Project brochures are made by advertingprofessionals, which portray a totally different scene from what is actually being developed. Amenities are overstated, maintenance costs are conveniently ignored and the consumers are misled to believe that surrounding estates will also be as pleasant as depicted in the advertisements. Sample flats shown by the developer have class graded amenities but in reality the ones provided on completion are cheap knock-offs.

The Developer always finds avenues to delay handing over the estate to the society (read: housing society), primary reason being:

i. He can charge more maintenance

ii. If,FSI is increased, the developer can benefit by developing the same estate further with a higher market price.

The Real Estate bill tries to curb these activities and help overcome the hardship faced by buyers. The core objective of the bill is to protect the interest of the buyers and promote fair play in real estate market.

The highlights of the Real Estate (Regulatory and Development) Bill are:-

1)   There has been no solid framework for any regulation to set in in this sector and this bill will successfully formulate a uniform regulatory environment for Real Estate.

2)   The Government is set to establish,first and foremost, the Real Estate Regulatory Authority (RERA). This body will be created for the registration of Real Estate agents and their subsequent projects. Appellate Tribunal of Real Estate will also be devised so that the decisions of RERA could be appealed. This will result in less pressure on the judiciary and thereby result in faster dispute resolution through these forums.

3)   The Bill outlines the duties of developers, buyers and agents in the Residential Real Estate sector.

4)   Developers will be barred from booking or offering any Real Estate projects of Residential(housing,condominium,town homes) Commercial (offices, warehouses) and industrial (factories, workshops) nature for sale without registering them in RERA. The information of the promoter would be uploaded with the details of above mentioned point in the website of RERA.

5)   To prevent diversion of funds  from the project, the bill envisages that 70% of the money paid by the buyer should be maintained in a separate escrow bank account for the construction of the project to cover the cost of construction, including but not limited to, the cost of the land. The developer will be allowed to withdraw the amount,subject to terms and conditions set in the legislation.

6)   Standard model agreement will have written clauses with respect to completion certificate and payments.

7)   All measurements will be disclosed in terms of carpet area only. This brings about uniformity. Carpet area is the area which includes usable spaces like kitchen and toilets, and it would be clearly defined to impart clarity, which was not the case prior to his bill. Misleading terms like super-built up will be barred or will not have any legal backing.

8)   Structural Defects: It is suggested that builders will be liable for structural defects with imprisonment of five years which is more than the earlier prescribed punishment of two years. “In such cases, the jail term is that of one year or five per cent of the apartment cost or both. Other pro-developer measures include single window clearance and digitization of land records.”  Defect liability period for quality of construction is now 5 years.

9)   The bill also brings about an increasingly regulated broker environment.Brokers are also required to register with the Regulatory authority.

10)    At least 2/3^rd of the buyers consent will be needed if the developer wants to alter the plans,structural designs and specifications of the building.No changes in the project plan at a later stage.

11)  No Discrimination: There will be no discrimination based on caste, religion, creed, or gender. The government may bring a non-discriminatory clause to allow anyone to buy a property in the complex, even a transgender.

12)  Resident Welfare Association: “Formation of resident welfare association has been made compulsory within 3 months of the allotment of the majority of the units in the project so that buyers get to utilize facilities such as common hall, club house, reading room”.

The main purpose of the Bill is to restore the confidence of the people in the Real Estate zone by introducing transparency and accountability in the housing markets.Along with guaranteeing speedy trials of disputes and growth to the sector, “it also ensures to curb corruption and use of black money in the real estate market, the Bill will include some provisions which will help in tracking down innumerable sources of black money which currently costs the government Billions of rupees in lost taxable income.”

    COLLECTIVE FAILURE OF SYSTEM

 

The culture of ‘Self –enriching’, growing rich at the cost of others, is fast catching up in India, courtesy the politicians and the failure of systems to penalize them,thereby failing the ‘Doctrine of unjust enrichment’.

Mr Vijay Mallaya left the country, not set to return in the near future, similar to Mr. Lalit Modi and the notorious Dawood Ibrahmin.

The systematic failure of the Banks and the Regulatory system, in tandem with the blatant irresponsible use of the Kingfisher conglomerate funds as the promoters personal money bank all culminated into this massive blow up.

BANKS

a) The total amount that KFA owes to all banks is approximately Rs. 9,000 Crores, broadly divided between the banks as,SBI Rs. 1,600/- Crores, IDBIRs. 800/-Crores,PNB Rs. 800 Crores,BOI Rs. 650 Crores,BOB Rs. 550 Crores.

b) Consortium of 17 lenders led by SBI had from time to time extended loans on favorable terms to KFA. Was Due diligence properly conducted? Was credit appraisal properly done? With individual risk of each bank being stretched by individual loans, a consortium loan would further weaken the banks security and stretch the company’s asset cover to its limits.

c) Every bank has a credit committee.Their role in sanctioning huge amounts? As mentioned before, the banks had individual credits extended to the company along with the consortium loan. This fact in itself should have raised red flags within the banking system as it goes well beyond the banks systematic risk.

d) Were they convinced to finance an aircraft which they had never done in their life? Nor having knowledge of financing aircrafts? A capital intensive industry in a competitive market built on cash flows and working capital is massive risk in itself which requires strenuous planning and sound crisis mitigation systems in place. 

e)In the year 2009-10,the consortium restructured their debt, even when KFA had negative net worth and was technically categorized as an NPA. As a stakeholder, the banks should have raised concerns and filed for creditors liquidation given the bad shape of the company’s debts. However, restructuring the same debt was bound to fail, and the banks had a moral duty to end the company then and there. Ignoring the moral duty, they converted the loan into equity, that too at a premium. Rs. 1,355 Crores of debt was converted into equity at 61.6% premium of market price. In lay man’s terms, a loan was converted into capital. Who benefited from this? Certainly not any of the stakeholders!

f) A common element in all of the lending’s was the reliance on the Kingfisher brand value and its (assumed) ability to generate cash. How far can one take the reliance on ‘brand value’? How reliable is the valuation itself. Given the bad shape of the debt in the company and the conglomerate as a whole, shouldn’t the brand be revalued from time to time to reflect its true value?

h) Inspite of all the aforementioned problems the company was facing, Vijay Mallya drew a salary of almost Rs. 34 Crores. Was there no shareholder activism or moral obligation on the any of the lenders and Financial Institutional Investors to oppose this practice?

i) The auditors, of the Banks as well as KFA, must have notices this bubble of loan bloating up for quite a while. In a situation which escalated to non-payable debt of Rs. 9,000 Crores, none of the auditors of any organizations which were a part of this transaction had qualified any of the audit reports. Isn’t this a breach of the auditor’s fiduciary duty?

Let us not forget that every company here had to file its compliances regularly to regulators from every spectrum of the economic industry. Which brings us to the next point.

REGULATORY AUTHORITIES

The Enforcement Directorate, RBI, Directorate of Aviation, the quasi-judicial body of DRT, the Registrar of Companies, the Income tax authorities and ultimately the Stock Exchange and SEBI. All of these regulatory bodies had received some form of literature pertaining to KFA’s predicament, and yet, no suo moto action was taken. Some of the issues which these bodies should have picked can reiterated, such as:

-          Conversion of 20%loan in to equity when net worth was flattening.

-          Was prudential credit exposure limits followed by banks?

-          The borrower’s inadequate credit ratings and the Company’s eligibility. KFA’saviation license was cancelled in the year 2012 and had not flown since then. How such a company which fails the basic test of ‘going concern’ allowed to raise debt on a continuous basis.

-          The Labour commissioner did not take any action in spite of salaries not paid on time.

CBI issued Look out Circular(LOC)against Mallaya in October and changed it back in November. Why weren’t any reports raised to question this action which was obviously on the right track? SFIO tightened their grip on defaulting companies and the irresponsible lenders but only when it was too late. Stakeholders expect a more pro-active intimidation from regulatory authorities. Similarly, DRT has given adjournments a multitude of times, which can be viewed as a failure of the judicial system. Did all the aforementioned investigating agencies act with rectitude in the KFA case?

KFA

KFA was incorporated as a birthday present to the son of Vijay Mallya, Siddharth Mallya, on his 18^th birthday, listing him as one of the Directors. At the inception, the airline functioned in able hands actively killing the competition by setting up benchmark of affordable luxury travel. However, it started going downhill soon after. It started being used as the Mallya’s personal charter airline, which primarily came into focus when he flew in pop star Enrique Iglesias for his 60^th Birthday, and started directing personal attacks on other airline by tweeting about their poor service. Furthermore, the Basic principles of corporate governance were not followed while running the company, let alone ethical standards.

He is drawing salary as Rajya Sabha Member(tax payers money) and he ran away from India on Diplomat  passport.  

This is not a one –off story.Such stories get repeated with alarming regularity and yet every time the regulators swoop in when the worst has passed. Jindal Steel & Power,Jai Prakash Associates whose ratings have been downgraded by 2 notches in a single action, indicate that they need to be monitored more closely.