Regulate real estate and gold

Investing in most asset classes has become safer in the last decade as regulators have taken strong measures to protect investors. Banks in India have always been strongly regulated by the RBI.

Mutual funds and insurance companies have also seen a regulatory transformation. But two asset classes where Indian investors put most of their money — real estate and gold — have virtually no regulation yet. A major portion of Indian household wealth lies in housing. Gold holdings, after taking into account unaccounted imports and ancestral holdings, are estimated in the region of 25,000 to 30,000 tonnes. The value of this gold at current prices will be $1-1.25 trillion.

More disclosures needed

The recent controversy around the Campa Cola compound in Mumbai has bought to the fore the need to regulate builders more stringently. To start with, what are the entry barriers to the business?

Today, all that is required to be a real estate developer is ownership of land. There is often no check on whether the developer is flouting rules, delivering to deadlines or delivering a quality product.

The main issue is with residential real estate. Have you ever wondered why residential real estate prices have not come down despite the economy going through a period of extreme slowdown and interest rates ruling high? Real estate companies are not finding it easy to raise equity funding and even bank funding is difficult to come by. But residential real estate is funded by the buyers of the property in many cases. There is no one to regulate the quality of construction either. On top of that, there are terms such as built-up and super built-up areas that confuse buyers. In some cases, builders start construction in connivance with local authorities without having all the requisite permission. Which financial product can be sold just after making an application to the regulator?

There have been many instances where floors or rooms in a building have been declared illegal after construction, or where the builder has got into financial troubles because of which projects have been delayed. In such circumstances, banks that sanction the housing loan will pursue the customer and not the builder. These loopholes can be plugged by a few disclosures and changes to law.

Mandating public display of permission granted and pending at the sale office and the building sites. This will help the customer take a call on buying into the project. Expected timelines for getting the requisite approvals also need to be displayed.

Most residential projects have a negative equity from the builder as the collections from customers are greater than the amount invested in the project in most cases. The builder’s contribution should be disclosed.

Penalty for delays should be severe. Most builders have a provision for paying interest on delayed delivery. But the cost of delay to the customer is much higher because housing loans also entail principal repayments.

Accounts fo r each project must be segregated. Most builders collect money from customers, which may be diverted to other ongoing projects; this must be barred.

The Real Estate (Regulation and Development Bill) 2013 addresses some of these concerns by seeking registration of the builder, prior approval for project launch and segregation of accounts. However, it may not completely deter fund diversion. Penalties too, are not as severe as they should be.

Gold needs liquidity

Gold jewellery purchase is a tradition in India, but this is one segment where transparency is very low. The customer has to take at face value the contention of the jeweller on the purity of the product. One jeweller often refuses to recognise the purity certificate of another. And whenever a customer sells old gold, he never receives the entire value back. There is even greater opacity in diamonds and other precious stones where there is no buyback value except for solitaires.

The regulatory changes required here are:

There should be mandatory and uniform hallmarking of the quality of gold. Once hallmarking is made mandatory it should be made compulsory for all regulated jewellers to buy back hallmarked gold at the current market price without any charges. Jewellers can earn margins through making charges on jewellery. The value of the gold should be sacrosanct.

In the case of precious stones and diamonds, certification should be made mandatory. Buying of diamond jewellery is relatively a new trend in India; many buyers think that they will be able to sell diamond jewellery in the same manner as gold. The reality is different as the charges on buyback can be quite steep.

Bills should have a break-up of material and making charges, ensuring transparency.

Unlike other countries, jewellery in India is bought as a store of value and not mainly as adornment. Therefore, it should actually store value and not destroy it.

The points made here may not be exhaustive but highlight the need for consumer protection in two segments that make up 10 per cent of India’s GDP.

(The author is a financial consultant)

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