INDIA BUILDERS URGED TO CLEAN UP ACT

Errant companies face up to three years in jail

MUMBAI

INDIA’S notoriously unreliable property developers have been put on notice: clean up your act, or you could end up in jail. Under laws that came into force on Monday, developers have to use at least 70 per cent of sale proceeds to complete residential projects, rather than funnel money to other jobs, and will no longer be allowed to start pre-selling apartments before all building approvals are obtained. Developers who do not comply with the new laws face up to three years in jail.

The moves are aimed at cleaning up an industry where more than 30 per cent of housing projects run at least a year over schedule, and developers are known for corner-cutting tactics such as starting work before all approvals are granted and using sub-standard materials.

Developers accused of wrongdoing have seen their shares tumble, even as the main property index has surged this year.

The changes may wipe out thousands of small developers who can’t comply, according to property consultancy Liases Foras Real Estate Rating & Research Pvt.

“The new law was required as a deterrent,” said Pankaj Kapoor, founder of Liases Foras. “Now developers won’t be able to misuse and siphon money as they did in the past. Many builders who didn’t have the net worth were leveraging themselves beyond their means”

Under the new laws, developers will be required to post quarterly updates on the progress of projects on the regulator’s website, and any defects found within five years must be fixed by the developer free-of-charge within 30 days.

The tougher regime expands a crackdown on errant developers that has seen executives from Unitech Ltd, Orbit Corp and Hubtown Ltd arrested or jailed on a range of charges from fraud to failing to meet deadlines for finishing houses.

The owners of Unitech, brothers Sanjay and Ajay Chandra, were arrested last month on charges of cheating homebuyers and delaying the building of houses. Pujit Aggarwal, the chief executive officer of Orbit Corp, was jailed in September on cheating charges, while Hubtown’s Vimal Shah was arrested for fraud and siphoning money from a state-sponsored housing project.

Orbit shares have slumped almost 50 per cent since July, and Unitech has declined 32 per cent in the same time. However, developers have rallied this year, with the S&P BSE India Realty Index gaining 55 per cent, outstripping a 12 per cent advance in the broader S&P BSE Sensex Index.

The new laws will increase housebuyers’ confidence in the industry by forcing out fly-bynight developers, giving an edge to established firms, according to JPMorgan Chase & Co.

Developers have also welcomed the changes. The laws will improve consumer confidence and push unprofessional companies from the sector, said Abhishek Lodha, managing director of Lodha Group . Bloomberg