India's uphill battle against black money in real estate

Nov 21 2012, 12:12 IST
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India's uphill battle against black money in real estate. (Reuters) India's uphill battle against black money in real estate. (Reuters)
SummaryScandals in India's coal and telecoms sectors involving large corporate houses and politicians have rattled investors.

in every stage of a project from land acquisition to home sales.

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 Kolhapure's problem.

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.

CORRUPT OFFICIALS

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

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