MUMBAI, Nov 21 (Reuters) - Ulwe, a village of dusty, uneven
streets on the outskirts of Mumbai, lacks basic amenities like
water supply and electricity, but a two-bedroom, 1,000 sq ft
house costs about 5 million rupees ($91,000), beyond the reach
of many middle-class Indians.
According to prospective buyers, many developers will demand
up to 30 percent of that price in cash, a small slice of the
ubiquitous, unaccounted "black money" that costs India's
straitened exchequer billions of dollars in lost taxable income.
Legislation that would bring more transparency to the
industry will be considered during the winter session of India's
parliament, which starts on Thursday.
However, investors, tax officials and bankers Reuters spoke
with were sceptical the law would stamp out illegal practices
they say are closely entwined with politics.
"Four out of 10 developers were ready to do it in full white
and six were asking for a black component," said 35-year-old
Umesh Kolhapure, who was looking for a three-bedroom house
around Ulwe, near the proposed site of a new international
airport serving the country's financial capital.
Recent high-profile scandals in India's coal and telecoms
sectors involving large corporate houses and politicians have
rattled investors in Asia's third-largest economy, where
undeclared wealth has long been rampant.
Real estate accounts for a large share of illicit
transactions, thanks to lax regulation and the numerous
approvals needed for projects, making many ordinary people party
to corruption and pricing some of the emerging middle class out
of the market.
That has prompted the newly-appointed housing minister, Ajay
Maken, to push a real estate regulation bill.
Designed to bring greater accountability, transparency and
prevent fraud and delay, the bill proposes appointing the
sector's first national regulator. However, it will not have
control over land deals, which is where illicit activity is
widely believed to be rampant.
"The bill is not going to help solve the issue of black
money," said Anurag Mathur, chief executive officer of project
and development services at Jones Lang LaSalle.
"Black money is tied in or shifted through land transactions
and the regulator will have no jurisdiction over that."
In the year to June 2012, about $6 billion, or 30 percent of
total transactions in the property sector, were executed using
black money, according to Liases Foras, a consultancy.
Real estate accounts for more than a 10th of India's $1.85
The government says black money, a term widely used in India
to describe undeclared funds, often meant to avoid taxes, can be
present in every stage of a project from land acquisition to
For the purchaser of a 5 million rupee home like those in
Ulwe, a developer might typically ask for 1.5 million rupees in
cash while making out a sales agreement for 3.5 million.
With banks willing to lend up to 75-85 percent of the
"official" sale price, the buyer will then need to fund anything
from 45 to 60 percent of the total cost from savings, which is
difficult for many salaried, middle-income househunters.
"It is unfair on the buyers," said Kolhapure, who has put
his search on hold in the hope of a price correction that will
help him afford a home for his family of five.
If the bill comes into force it might go some way in solving
The draft says developers will have to get accreditation for
projects from the regulator, make public disclosure of details
including the price of units, and maintain a separate bank
account for each project to collect payments from buyers.
However, there is widespread cynicism about whether it can
stamp out the practice given the belief that a large share of
illicit money sloshing around the sector is tied to politicians.
"There can't be a legal measure to put an end to black money
... because ultimately it ends up in the political cycle. That
is where the requirement is," said a Mumbai-based income tax
official who did not wish to be named.
Allegations last month of improper dealings between the
son-in-law of ruling Congress party chief Sonia Gandhi and DLF
, India's biggest property developer, underline the
perception of a nexus between developers and politicians.
Activist group India Against Corruption accused DLF of
arranging favourable loans and real estate transactions for
Robert Vadra, a businessman married to Gandhi's daughter, who
had previously announced a possible move into politics. The
company and Vadra both deny wrongdoing.
Central bank rules prohibit bank loans to fund purchases of
land, a regulation designed to curb speculation and reduce
balance sheet risk for banks. To fill that void, wealthy
individuals, including politicians, are widely believed to
invest "black money" in real estate.
Some of that money can later be poured into election
campaign donations from developers, say private equity
investors, real estate consultants and sector analysts.
Those same developers might be awarded with plots of land at
attractive prices or assisted in getting project approvals.
Black money comes in handy for bribing corrupt officials.
"There is a cost of pushing the file. But what is the
alternative?" said Lalit Kumar Jain, chairman of the
Confederation of Real Estate Developers in India (CREDAI).
For a typical residential project in Mumbai, developers need
about 55 approvals from more than a dozen departments. Delays in
consents add 40 percent to a project's cost, said Jain.
At least 10 developers Reuters tried to reach including DLF
Ltd, Oberoi Realty, DB Realty Sobha
Developers, and Hiranandani did not respond to emails,
declined to comment or did not make officials available.
CREDAI backs the pending legislation that would create a
single-window clearance for approvals, which it says will reduce
the temptation to pay bribes. Getting consents in time would
make homes cheaper by 25 percent, Jain said.
"Our biggest problem is the approval process," said Jain,
who is also the managing director of Mumbai-based property
company Kumar Urban Development.
"That is the only corruption we know of and where we are
victimised and exploited. Otherwise developers are clean."
($1 = 54.9700 Indian rupees)
(Editing by Alex Richardson and Tony Munroe)