<b>Avirup Bose & Pratik Datta:</b> An Act that hinders competitiveness

The provisions of the Real Estate (Regulation and Development) Act, 2016, are more coercive than what were required to address market failure


A market economy requires government interventions to precisely address identified market failures. However, in choice of government interventions, the least coercive ones should be preferred. Because lesser the coercion, lesser are the possibilities of distorting the competitive forces within the market economy. In parliamentary democracies, legislation making is often a populist reaction, where accounting for the impact of regulations on the long-term interests of the public and the economy, may seem politically esoteric. However, for an India focused on improving its World Bank "Doing Business" ranking, the exercise assessing regulatory impacts on the continued survival of competitive markets, cannot be an also-ran activity.

The Competition Commission of India (CCI) has provided such an assessment framework by adopting the Competition Assessment of Legislations and Bills Guidelines, 2015, which are in effect from January 2016. The guidelines provide a useful toolkit to assess if a proposed or adopted economic legislation affects a market where products or services are supplied by private or public sector organisations. The assessment requires asking the basic questions: Will the law directly or indirectly limit the number or range of suppliers, limit their ability or incentive to compete or limit the choices and information available to consumers? If the answer to any of the above questions is in the affirmative, the CCI would identify the affected markets, assess the impact on competition in such markets and propose alternatives to the government.

Applying this framework to the Real Estate (Regulation and Development) Act, 2016, we find considerable anomalies. According to the preamble, the Act seeks to protect the interests of consumers of real estate - an area of potential market failure. However, the provisions of the Act are far more coercive than what would have sufficed to address this market failure. These will hamper competitiveness of India's real estate market, which will ultimately hamper consumer interest - the very purpose of the law.

First, the new law requires prior registration of a real estate project with the Real Estate Regulatory Authority (Rera). The registration will be valid for the time period within which the developer expects to complete the project. Rera is empowered to revoke the registration because of default on the part of the developer or on account of non-compliance with any rule or regulation under the law or any terms or conditions in the approval (defaults on any ground, no matter how minor or technical it might be). On either lapse or revocation of registration, the Act allows Rera to oversee the effective usurpation by the state, of the right to develop the land from the real estate market player. This power is disproportionately coercive and may limit the ability and incentive of the developers to compete, especially when it involves undertaking market risks. Also, it raises a potential conflict of interest where the state is both the regulator and a market player developing unfinished real estate projects. Instead of this coercive legal provision, fair competition among developers could have been enhanced had the Rera been given the power to auction such a lapsed or revoked real estate project to other private market participants.

Second, the new law requires 70 per cent of the amount a developer receives from allottees to be deposited in a separate bank account to cover the cost of construction and the land cost. Further, the developer is prohibited to receive more than 10 per cent of the cost of the apartment, plot, or building as advance payment without entering into an agreement of sale. The aim of the provision is to prevent fraudulent diversion of funds collected from allottees - a matter of regular litigation before India's consumer courts and the CCI. However, such fraudulent diversion could have been prevented through other less onerous measures, too. For example, a requirement to furnish a performance bond or insurance could have achieved the purpose. Instead, fixing a rigid capital reserve ratio in the statute itself imposes greater liquidity constraints on developers, consequently impacting their entry into the market and subsequent expansion. Given the inadequate formal funding channels for the sector (2015 KPMG report, "Challenging the tides: Indian real estate") these restrictions may detrimentally impact small developers from competing in the real estate market.

Third, the Act creates multiple forums for dispute resolution of consumer grievances in the real estate sector. Though the Act prevents any civil court from exercising jurisdiction on such matters, consumer forums under Consumer Protection Act, 1986, are not excluded. Moreover, the Act gives consumers the discretion to withdraw a pending matter from a consumer forum and file it before the Rera. Consequently, the consumer courts, Rera (and even the CCI) will continue to simultaneously exercise jurisdiction, facilitating forum-shopping and conflicting jurisprudence. Market participants and consumers will be the ultimate losers.

Avirup Bose is an assistant professor of competition law at the Jindal Global Law School. Pratik Datta is a consultant with the National Institute of Public Finance and Policy
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of or the Business Standard newspaper

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First Published: Mar 31 2016 | 9:47 PM IST

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