Friday, March 18, 2011

Cleaning up corruption in Real Estate and Land deals.....

Why is there so much corruption in the real estate sector? This post discusses the reasons and suggests a way to clean it up.....

Real Estate is one of the biggest sectors from where black money originates. Especially in Bombay where property prices are the highest as also the ability to pay. Anyone who has lived in Bombay knows that this city has no space left for growth and therefore constructing taller and taller buildings is the only solution. On the one hand, it’s a matter of “pride” for Bombay to have such glittering skyscrapers; but on the other hand, it’s also a dire necessity. It’s no longer enough to build 20-30 storey we need 100-storey structures. Of course, we must take care of the requisite infrastructural facilities.

But our archaic FSI laws make it impossible to do so. The usual FSI as per state government rules is some 1.4 in the island city and 1 or so in the suburbs. Under this policy, we can’t construct even 20 storey towers.....this leads to a shortage of flats and higher prices. As prices go up, there is a strong motivation for government officials who give sanctions to building plans to cheat. Builders pay bribes to the politicians and the babus to increase the FSI. The government has given itself “discretionary” powers to increase FSI. Concepts like “flower beds”, “parking lots”, etc are exempt from FSI calculations. This becomes the conduit for bribes to be paid.

There is always a sound logic dished out for such arbit exemptions. Flower beds are small areas adjoining the living area (any/all rooms of the flat) for growing plants. This makes the flat look beautiful. Some green activists would even argue that this helps the environment (!). These are all the excuses doled out for public consumption. The reality is that this provision provides an easy way to increase flat sizes while still staying within the FSI law. In many buildings in Bombay now, the flower beds are 8-10 feet wide! Imagine this much area being added to a normal room which may be only 15-20 feet in width. That’s like 40-50% more area constructed without being calculated in the FSI! No one obviously verifies if the said area has indeed been used as a flower bed or if it has been taken into the room. No one can. Would you like the municipal authorities entering your house to check if the flower bed is indeed a flower bed?! It was never supposed to be for flower was just an ingenious solution developed by the entire “system” to circumvent an archaic policy problem which it itself created.....and is loathe to change!

Likewise, take the parking lots exemption. It looks to be a good policy on paper. Builders who want more FSI have to build multi-storeyed parking lots for the public. The problem is that the parking lots, in reality, are not built “for the public”, but to serve the interests of the builders. Public access to the parking lots is intentionally made difficult; so in reality it’s not the public that uses the lots. Some 20,000 parking lots were sanctioned in just Lower Parel in the last few years under this scheme. In reality, everyone except the public benefits....the builders since they get more FSI. The flat buyers because they get more parking space. And the babus and politicians who get their kickbacks......Ingenious, isn’t it?!

It’s not as if the flat buyers benefit.....they are charged for everything – flower beds, parking lots et al. But in an indirect manner. In a devious, surreptitious way, he is made to pay for something called “super built up area”. I think this concept exists only in Bombay. The builder charges you for areas which he is not allowed to charge for. When you pay for an area that is not even part of your flat, that area is the super built up area! The super built up area is often 50% more than the actual “carpet area”. So flat owners pay more; the builder makes a lot more; the builder pays a lot more for the land he acquires; and he also pays bribes from this excess collection. And the cycle continues! And everyone is happy!

Why can’t we get practical and simply increase FSI to 4? We should specify adequate parking requirements, the need for “open space”, good connecting roads and the like in the policy itself. In all big cities around the world, there are huge skyscrapers. Why can’t Bombay’s builders build skyscrapers without having to earn some government official’s favors? Recently, the Maharashtra government did try to increase the FSI officially to 4. But there were widespread protests that this was being done to satisfy the builder lobby. Maybe it’s true. But if the FSI was increased, then at least corruption in real estate would come down substantially. With accusations of favoring the builders being amplified by the media, the government’s gone back on its plan .....

Now let’s look at the associate issue of land. The PM suggested y’day that stamp duty should be reduced for land transactions. If this is done, then there would be lesser incentive to under-declare the value of land deals. The same was seen when Income Tax slabs were reduced. In fact, the famous “Laffer Curve” suggests that whenever tax rates are collections actually increase. People feel motivated to pay up and come clean. The same would happen with land deals if stamp duty rates were reduced. I hope the government goes ahead with this proposal.

There is also this problem created by something called wealth tax. I think it’s a flawed concept to begin with. If the wealth has been built after paying taxes, then why should it get taxed again? The pinch of wealth tax is felt the most in Bombay. Old properties in “town” are now worth wealth tax becomes payable.....but many people who own these flats have no incomes left to pay these taxes. Since land and real estate makes up the bulk of our wealth in any case, wealth tax becomes another reason for under-declaration. If it was scrapped or made minimal, then land deals would become clean also.

But the point is: Does anyone want to clean up real estate? I don’t think so....because if real estate was cleaned up, then where would the black money come from? Who would fund the elections? How would babus and politicians enhance the measly salaries that we pay them officially? So we need to reform these also. In other words, we need to clean the “need for corruption” issues along with the “sources of corruption” to effectively reduce corruption.

The real truth? We don’t have the statesmen required to carry out this clean up. Neither in politics, nor in bureacracy. And if any stateman did emerge, the media would quickly bring him/her down. After all, the media in this country thrives on sensationalism; not in nation building. If media did not have sensational issues left.....if they had no one left to pull would they survive?!


  1. More cynical than your usual fare but i totally agree - we should banish terms like super-built up area; free up FSI and generally do what IRDA and SEBI are doing in the Insurance and Investments world in Real Estate. I am all for a RE regulator!

  2. Super point sk! Never saw it in terms of a regulator for real estate. My point really was that we need to modernize our laws but that needs guts and I am not sure our political system allows that at the moment. So we turn to jugaad and that's sad! I wish we could go back to the days when we had single party governments