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In 2016, the comprehensive Benami Transactions (Prohibition) Amendment Act was passed, 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 laudable.
As with all other regulations, such as the Real Estate (Regulation and Development) Act and the Land Acquisition Rehabilitation and Resettlement (Amendment) Bill 2015, the Benami Transactions act is also aimed at increasing transparency and professionalism in the industry.
The practice of adding the correct name to the property transacted, will bring transparency in the residential markets. With increased transparency, title risks will reduce, thereby, boosting buyers’ confidence. It will also increase professionalism and the tag of corruption and unaccounted wealth, which follows most developers, will hopefully, be limited to a few unethical players.
Lender confidence (whether it is private equity or banks) will also receive a fillip. Multiple ownerships, false ownerships, as well as unknown ownerships plague the residential sector, especially in the mini-metros and non-metro markets. Today, when titles are not clear, the lending institution often conducts its own title search on a property, before approving the loan. With increasing bad debts, it is no surprise that banks undertake careful scrutiny of the ownership prior to lending.
The number of benami transactions in land, is large and we expect the amendment to have a positive 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, most developers are opting for joint ventures. After multiple discussions on revenue sharing and interpretations of permissible FSI, it is often found that the land title itself is not clear. With the new amendments, hopefully, clarity on titles will improve. This will help developers, to conclude joint venture transactions in land quickly and open up land parcels for residential development. Exits, by funds participating in transactions, will be quicker.
Impact on supply of residential units
The amended bill seeks to establish four authorities, to conduct inquiries or investigations regarding benami transactions:
- Initiating officer
- Approving authority
- 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.
This means that a lot of responsibility lies on the initiating officer, for tracking a benamidar. Secondly, all these authorities have to work in tandem, to establish a property as benami. Lesser moving parts, would have made foul play easier to track. Moreover, once the property is confiscated, it will either be auctioned or used by the government. Hence, the impact on the overall supply in residential markets, will be minimal.
Will there be any meaningful rationalisation in residential prices?
Rich investors, who wish to park unaccounted wealth, usually undertake benami transactions in real estate, to dodge tax authorities and to earn a decent return on investments.
Will such investors be pushed out of the market, thereby, leading to a more end-user driven market and a scaling down of prices? We do not believe that there will be any major impact on residential prices. 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. 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, as there will be a fear among the cash-rich investors of being tracked down.
Stringent punitive measures
The new law 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. Hopefully, this will result in a much-needed cleansing in the real estate sector. The success of the amended act, will lie in its quick and strict implementation. Else, the mystery of true ownership will remain unsolved.
(The writer is chairman and country head, JLL India)