The real estate sector in India is believed to be one of the largest recipients of black money and any attempt to control the deployment (and by extension, generation) of black money has to turn to reforms in the real estate sector. An important problem in real estate transactions in respect of black money is that the actual price of the transaction is known only to the buyer and the seller, and is not disclosed correctly to the government. Often, the price disclosed is well below the actual price of the transaction. This leads to lower tax collection and provides a relatively riskless avenue for deployment of black money, apart from wiping out any trail of black money for the tax authorities. Another pernicious impact of price under-reporting is that black money crowds out white money offered by honest taxpayers, leading to skyrocketing real estate prices.
To counter this problem, we can put in place a mechanism which ensures that the reported price becomes the same as the actual price of the transaction. The proposed mechanism is on the following lines. A government-owned website should be created and it should be mandatory for anyone willing to sell his real estate property to register on this website, expressing his intent to sell his property. The prospective seller must also declare his reserve price (the minimum price acceptable) for the sale of the property, and provide the location, area and other relevant details of his property.
Once a property has been listed for sale by its owner on this website, any prospective buyer can submit his bid for the property, which must be above the reserve price quoted by the seller, within 30 days of such listing. After completion of the 30-day listing period, the prospective seller will have the option of either not selling his property, or selling the property only to the highest bidder available on the government website. If there is a case in which no buyer bids above the reserve price quoted by the seller, then the seller has a right to list his property anew on the government website for another 30-day period, with a reduced reserve price.
No property sale or purchase should be registered in any government registry before the property has been listed in the government website for at least 30 days. Further, the seller can register the sale of his property only to the buyer who has bid the highest amount on the government website. The quality of the property and the title verification (due diligence) will continue to be the responsibility of the buyer, as is the case right now. The government may also think of creating an agency which can certify the genuineness of the title of any property, thereby remedying the widespread market failure due to the asymmetry of information regarding the sanctity of the title between the seller and the prospective buyers.
There is a possibility of frivolous bids vitiating the entire process. To prevent frivolous bids from non-serious buyers, every bid must be accompanied by security money (10 per cent of the bid amount), to be deposited in a government escrow account, attached to the website. If a bidder turns out to be the highest bidder and refuses to pay the bid amount, then the security money in the government escrow account should be forfeited and the right to buy should be passed on to the next highest bidder.
To prevent the prospective seller from fixing a very high reserve price, an amount equal to one per cent of the reserve price quoted should be deposited in the government escrow account by the seller at the time of listing his property for sale on the government website. This amount will be forfeited if the seller refuses to sell to the highest bidder, provided the bid is above the reserve price quoted by the seller. The consideration for the purchase of property between the buyer and the seller should be intermediated through the government escrow account. The seller as well as every bidder must quote his Aadhaar number.
Unscrupulous sellers may try to skirt the mechanism described above by using the process of mortgaging/hypothecation, as a proxy for outright sale. A swifter variant of this mechanism may be employed for transparent price discovery even in the case of mortgaging/hypothecation. The proposed mechanism may also be challenged on the grounds of violation of privacy. Concerns about privacy can be adequately addressed by ensuring that the personal details of the sellers and bidders are not made publically available on the website — nothing beyond the property details would have to be made publically available on the website.
The proposed mechanism is an attempt to force real estate transaction participants to correctly disclose the price involved. There may be some other rough edges in the proposal that may require refinement, for which an informed debate is needed. However, it is high time that an innovative approach like the one described above is adopted to counter the practice of under-reporting the prices of real estate transactions, which has eluded a solution for far too long.
The writer is Deputy Secretary in the Cabinet Secretariat