What's wrong with the real estate sector in India
Paromita Banerjee is livid. Her builder has asked her to make illegal payments to seal her Rs 40 lakh flat purchase in Navi Mumbai. The 32-year-old IT professional, who has never given or taken a bribe, has to pay Rs 2 lakh for water and electricity connections, even though these are her entitlements. And an equal amount for a parking slot, even though the Bombay High Court disallows the sale of common area. All in cash.
All illegal. Her builder says he is helpless. He says he has to pay off officials in government agencies to finish the project and he has to stay on the right side of local politicians. He offers to help her save Rs 50,000 in stamp duty on registration by reducing Rs 6 lakh from her listed cost price. But then, Banerjee will have to pay Rs 6 lakh more in cash. Again illegal.
Banerjee represents a typical flat buyer in India. Her income is all 'white', but she is sucked into the 'black economy'. This has gone on for so long and it's ingrained so deep that it's become an accepted way of working for builders, brokers and even buyers. According to a survey by consultancy firm KPMG, 32% of respondents voted real estate as the most corrupt sector in India.
Niranjan Hiranandani, co-founder and managing director of the Hiranandani Group, agrees. " corruption is the highest in real estate and the government is aware of that," he says. "The process that asks a builder to take approvals from different agencies gives birth to corruption," adds Deepak Parekh, chairman of HDFC , the country's largest housing finance company. "Every stage involves malpractice."
The cycle of corruption
For instance, in Maharashtra, the country's largest real estate market, a builder needs about 60 approvals to construct a property. About 50 are from the municipal corporation. "These clearances should not take more than three months," says Kumar Gera, chairman and managing director of Pune-based Gera Developments. "But in most states, it takes anywhere between one year and four years.
And they add 20-30 % to a builder's project cost." Builders pass it on to consumers, and extend the circle of corruption and cash. "Builders don't just pass it on," says a regional MD of a real estate consultancy, not wanting to be identified. "They often add to it big time--for example, how they account for payments to suppliers-to dodge taxes and siphon off cash. Such payments and accounting tricks are a greater malaise." This intricate cycle has become the standard in the sector.
And it has spawned a way of doing business where everything is distorted : how builders price their projects, how they recognise revenues, how they pay their suppliers, how they value their land holdings, how they use their bank loans... Footprints of the sector participants can be found in indecorous places.
All illegal. Her builder says he is helpless. He says he has to pay off officials in government agencies to finish the project and he has to stay on the right side of local politicians. He offers to help her save Rs 50,000 in stamp duty on registration by reducing Rs 6 lakh from her listed cost price. But then, Banerjee will have to pay Rs 6 lakh more in cash. Again illegal.
Banerjee represents a typical flat buyer in India. Her income is all 'white', but she is sucked into the 'black economy'. This has gone on for so long and it's ingrained so deep that it's become an accepted way of working for builders, brokers and even buyers. According to a survey by consultancy firm KPMG, 32% of respondents voted real estate as the most corrupt sector in India.
Niranjan Hiranandani, co-founder and managing director of the Hiranandani Group, agrees. " corruption is the highest in real estate and the government is aware of that," he says. "The process that asks a builder to take approvals from different agencies gives birth to corruption," adds Deepak Parekh, chairman of HDFC , the country's largest housing finance company. "Every stage involves malpractice."
The cycle of corruption
For instance, in Maharashtra, the country's largest real estate market, a builder needs about 60 approvals to construct a property. About 50 are from the municipal corporation. "These clearances should not take more than three months," says Kumar Gera, chairman and managing director of Pune-based Gera Developments. "But in most states, it takes anywhere between one year and four years.
And they add 20-30 % to a builder's project cost." Builders pass it on to consumers, and extend the circle of corruption and cash. "Builders don't just pass it on," says a regional MD of a real estate consultancy, not wanting to be identified. "They often add to it big time--for example, how they account for payments to suppliers-to dodge taxes and siphon off cash. Such payments and accounting tricks are a greater malaise." This intricate cycle has become the standard in the sector.
And it has spawned a way of doing business where everything is distorted : how builders price their projects, how they recognise revenues, how they pay their suppliers, how they value their land holdings, how they use their bank loans... Footprints of the sector participants can be found in indecorous places.
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For example, in the 2G telecom case, real estate companies - Unitech and DB Realty - are alleged to be at the epicentre of both cases in which the accused are in jail. Similarly, most of the clients of Rajesh Sharma, the disgraced founder-chairman of Money Matters, a loan broker, were builders. In November 2010, Sharma was charged with bribing officials of public sector banks and financial companies to sanction loans for his clients. Other parts of the economy engage with the sector, but with fear and doubt.
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