Anuj Puri, Chairman & Country Head, JLL India
Last month, the Lok Sabha passed a comprehensive Benami Transactions (Prohibition) Amendment Bill 2015, with the intent of bringing unaccounted money into the system, as well as seizing benami property and prosecuting those indulging in such activities. The three-fold objective – Amending the definition of benami transactions, establishing adjudicating authorities and setting up an Appellate Tribunal to deal with benami transactions, and specifying the penalty for entering into benami transactions – is indeed laudable.
What does this amendment mean for the real estate industry, especially the residential markets? As with all other regulations, viz. Real Estate (Regulation and Development) Act and Land Acquisition Rehabilitation and Resettlement (Amendment) Bill 2015, aimed at increasing transparency and professionalism in the industry, the Benami Transactions bill is a further step in the same direction.
The practice of adding the correct name to the property transacted will bring transparency in the residential markets. With increased transparency, title risks will be minimized and buyer confidence during a residential property transaction will get a boost. A fresh breath of professionalism will be ushered in. The general tag of corruption and unaccounted wealth, which follows most developers, will hopefully be limited to the few genuinely unethical players.
Lender confidence (whether it be private equity or bank) will also receive a fillip. Today, when titles are not clear, the lending institution very often conducts its own ‘title search’ for a property before loan approvals. With the risk of increasing bad debts, it is no surprise that banks undertake careful scrutiny of the ownership prior to lending. Multiple ownerships, false ownerships, as well as unknown ownerships plague the residential sector, especially in the mini-metros and non-metro markets.
Land transactions will be smoother, as the number of benami transactions is large in land. Data on transactions is difficult to come by, and we expect the amendment will have a greater impact here. It is a well-known fact that land transactions in India take an average of 1-2 years for completion. With outright purchase of land no longer viable for most developers, the joint venture route has been adopted. Post multiple discussions on revenue share and complicated interpretations of permissible FSI, it is very often concluded that the land title itself is not clear. Single ownership titles and clarity of titles will hopefully see the light of day with the implementation of the new amendments. This will help developers aiming for a quick and successful closure of joint venture transactions in land and open up land parcels for residential development. Exits by funds participating in transactions will be quicker.
Will there be an impact on supply of residential apartments?
The amended bill seeks to establish four authorities to conduct inquiries or investigations regarding benami transactions: (i) Initiating Officer, (ii) Approving Authority, (iii) Administrator and (iv) Adjudicating Authority. It also states that if an Initiating Officer believes that a person is a benamidar, he may issue a notice to that person and he may hold the property for 90 days from the date of issue of the notice, subject to permission from the Approving Authority.
What this essentially means is that a lot of responsibility lies on the initiating officer for tracking a benamidar. Secondly, a network of players, the initiating officer, the approving authority, the administrator and the adjudicating authority, all have to work in tandem to establish a property as benami. Lesser moving parts would have made the foul play easier to track. Moreover, once the property is indeed confiscated, it will either be auctioned or used by the government. Hence, impact on overall supply in residential markets will be minimal.
Will there be any meaningful rationalization in residential pricing?
Cash-rich investors who wish to park unaccounted for wealth usually undertake benami transactions in real estate in order to dodge tax authorities as well as to earn a decent return on investments. Will this investor be pushed out of the market with the implementation of the amended bill? Will this lead to a more end-user driven market and hence a scaling down of prices? We do not believe that there will be any major impact on residential prices on this account. End-user demand is already present in the market, and there has already been a reduction in the number of active investors in the sector. Prices have remained firm where buyers have met their price expectations, and we see this as a continuing trend. The sector has seen an increase in private equity funding for well-established developers, and this trend is likely to continue. The ones who are likely to suffer are the smaller players who receive money from a few large investors during construction, for there will indeed be a fear among the cash-rich investors of being tracked down.
Stringent Punitive Measures Laid Down
The Bill seeks to change the earlier penalty of one to three years to rigorous imprisonment of one year up to seven years, and a fine which may extend to 25% of the fair market value of the benami property. We will hopefully see a much-needed cleansing in the real estate sector. The success of the amended bill will lie in its quick and strict implementation by the empowered authority. Else, the mystery of true ownership will remain unsolved.
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