Crores flow out through land law loop­holes

CAG re­port on prof­its from land touches just the tip of the ice­berg

HT Estates - - FRONT PAGE - Jee­van Prakash Sharma

Are­port re­leased on March 25, 2015, by the Comptroller and Au­di­tor Gen­eral of In­dia was widely re­ported in the me­dia be­cause of its ref­er­ence to M/s Sky­light Hos­pi­tal­ity Pri­vate Limited ( a com­pany owned by Robert Vadra). One part of the re­port, ti­tled Prof­its on sale of land, men­tioned five com­pa­nies, namely Sky­light Hos­pi­tal­ity Pri­vate Limited, Sun Star Builders Pri­vate Limited, Wit­ness Pvt Hous­ing Limited, Up­pal Hous­ing Pvt Ltd and Mark Buil­tech Pvt Ltd for sell­ing “land for ₹ 267.47 crore they had pur­chased for ₹ 52.26 crore and earned a profit of ₹ 215.47 crore in such trans­ac­tions”. Ac­cord­ing to CAG, th­ese trans­ac­tions de­prived the state gov­ern­ment of crores in rev­enues.

What the CAG missed men­tion­ing, how­ever, was that hundreds of de­vel­op­ers in Haryana were by­pass­ing real es­tate rules and li­cence con­di­tions to avoid pay­ing the state gov­ern­ment its share of prof­its.

Realty rules re­quire de­vel­op­ers to keep 15% profit they made from a project and de­posit the rest with the gov­ern­ment. .

Legally, in Haryana, only a landowner can ap­ply for a li­cense to set up a colony. Land prices shoot up once such li­censes are granted. To get a li­cence, gov­ern­ment rules re­quire that the owner “de­rive max­i­mum net profit at the rate of 15% of the to­tal project cost of de­vel­op­ment of a colony af­ter mak­ing pro­vi­sions of statu­tory taxes. In case the net profit ex­ceeds 15% af­ter com­ple­tion of the project, the sur­plus amount shall ei­ther be de­posited within two months in the State Gov­ern­ment Trea­sury by the owner or he shall spend this money on fur­ther ameni­ties/ fa­cil­i­ties in his colony for the ben­e­fit of the res­i­dents.”

By­pass­ing rules is sim­ple. De­vel­oper A plans a project and sells it to de­vel­oper B with­out com­plet­ing a project and mak­ing a huge profit as value of his land has ap­pre­ci­ated af­ter he ac­quires a li­cence. Since he has sold the project be­fore com­ple­tion, A does not com­ply with the li­cence pro­vi­sion of de­posit­ing ex­tra prof­its with the gov­ern­ment.

And that’s not all. Some de­vel­op­ers have floated sub­sidiaries. One com­pany gets the li­cence on the ba­sis of land it owns; it sells the land to an­other com­pany at dou­ble the cost; an­other com­pany does the con­struc­tion work and re­ports that its prof­its have

not ex­ceeded 15%.

How­ever, cal­cu­la­tions of the prof­its made by one de­vel­oper through sub­sidiaries paint a dif­fer­ent pic­ture – and show that one en­tity makes prof­its that are dou­ble and even triple the to­tal cost of the project. An of­fi­cial of the Depart­ment of Town and Coun­try Plan­ning of Haryana, on con­di­tions of anonymity, says ”Of­ten, a mem­o­ran­dum of un­der­stand­ing (MoU) or col­lab­o­ra­tive agree­ment is signed be­tween two dif­fer­ent com­pa­nies to by­pass rules. “A com­pany which gets the li­cense on the ba­sis of own­er­ship of land can’t trans­fer or sell the li­cense to any other com­pany. So it sells the land to an­other com­pany (which can also be its sub­sidiary) by sign­ing an MoU or col­lab­o­ra­tive agree­ment. As per the agree­ment, the sec­ond com­pany pays the to­tal land cost to the first com­pany but gets con­struc­tion and marketing rights to the whole project. The first com­pany earns a huge profit as land is the most ex­pen­sive com­po­nent of any project and the sec­ond com­pany re­ports it has failed to make prof­its in ex­cess of 15%. This is one of the in­stances. In many cases, a real es­tate firm has floated many sub­sidiary firms to evade the 15% profit clause.”

This is why the CAG in its re­port has rec­om­mended that “A proper mech­a­nism needs to be put in place to en­sure that in cases where land has been sold with­out com­ple­tion of the project, net profit be­yond 15% of the to­tal cost as such sale should be de­posited with the state gov­ern­ment.”

“Pro­ce­dures for en­ter­tain- ing ap­pli­ca­tions for de­vel­op­ing com­mer­cial colonies, cri­te­ria for de­ter­min­ing area norms, time­lines for com­ple­tion of projects etc need to be clearly spelt out. There is an ur­gent need to make the whole process trans­par­ent and clear. Fur­ther, li­censes should only be al­lot­ted to gen­uine de­vel­op­ers af­ter a care­ful and proper scru­tiny of the ap­pli­ca­tions,” the re­port adds.

Realty ex­per t s s ay t hat Haryana is the only state in which there is a pro­vi­sion un­der which a de­vel­oper can’t make more than 15% profit as the state gov­ern­ment thinks hous­ing is not a money-mak­ing busi­ness. The 15% profit clause ap­plies to both res­i­den­tial as well as com­mer­cial con­struc­tion.


On Novem­ber 22, 2014, HT Es­tates had high­lighted how the in­abil­ity of the Haryana gov­ern­ment to im­ple­ment a 15% profit clause could have led to mas­sive losses for the state ex­che­quer


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