India homes in on benami property
The Indian government is coming down hard down on the widespread problem of corrupt practices and black money inflows through “benami” transactions that have plagued the property sector for decades.
In a benami transaction, property or land is bought in someone else’s name or under a fictitious identity, often used as a way for the person to hide black money and stay under the radar of tax authorities. Benami is Persian for “no name” or “without name”.
With India being a cash-based economy, such illegal deals have been rampant.
But prime minister Narendra Modi’s government is on a mission to stamp out such corrupt practices and the prevalence of black money, most notably with the recent demonetisation of 1,000 and 500 rupee notes. As part of this drive, Mr Modi is also eager to bring an end to benami deals and clean up the property market. At the beginning of November, the government launched an amended, much stricter act. This includes punishment of imprisonment up to seven years and fines of 25 per cent of the property’s value and moves to investigate benami properties. Modifications have been made to close loopholes and crack down on benami properties, increasing the scope of transactions covered, and punishing those who facilitate such activities.
“Property was always the last bastion of black money,” says Jayashree Kurup, the head of advisory at Magicbricks.com, a real estate portal in India. “There was no law before that would allow them to clean it up the way the new benami transactions act will allow them to do. Overall the system is moving towards a new normal, which is white money transactions. The idea is to tighten the screws to make sure it’s really difficult to route black money into property.”
Black money was helping to sustain high property prices, and experts are widely predicting that the benami transactions act and the other efforts to clean up the system could have a significant impact on property prices.
“In a country like India that has a population of over a billion, [benami property] is one of the easiest ways to get rid of your unaccounted wealth,” says Sushil Raheja, the director of Raheja Homes, a property developer.
Falls of up to 30 per cent in valuations are being forecast by Knight Frank India.
“The act will mandate every person to buy properties in their own names rather than some fictitious person whose existence is not traceable or who denies to be the owner of such property,” says Aradhana Bhansali, a partner at Rajani Associates.
“The lending institutions will have more confidence, therefore would be able to finance the project at a lesser lending rate. On account of this crackdown, real estate prices will become affordable to the buyers.”
Arjunpreet Singh Sahni, the executive director of Solitairian Group, a developer based in Uttar Pradesh, describes the benami property act as “revolutionary” that will ultimately benefit buyers.
“It signals the beginning of a new era for the Indian real estate sector which is now headed for complete transformation in terms of transparency and best practices in real estate transactions,” says Mr Sahni. “Proper documentation and clarity on legal ownership of properties will undoubtedly help weed out the unscrupulous players from the market.”
Mr Modi’s move to reduce the flow of black money through demonetisation of the largest value notes will combine with the new act to help curb benami deals.
“Due to demonetisation, going forward black money generation will reduce substantially,” says Vijay Agrawal, the executive director at Equirus Capital, an investment bank. “This will have negative impact on benami property transactions [and] there will be fewer benami property transactions.”
Given the lack of cash in the system, Srinivasan Gopalan, the chief executive of the Ozone Group, a Bangalore-based developer, says there is now likely to be “a drastic drop” in the number of land transactions taking place in India.
“The government is taking the right steps in order to ensure that all these malpractices are stopped,” says Mr Gopalan. “People will dread having benami properties.”
The ultimate effect is likely to be one of creating a cleaner system, which will encourage foreign investors. Moves such as the creation of a real estate regulation authority are also helping to promote confidence in the property market.
“People with unaccounted income will surely have a tough time ahead – with such stringent laws, it will be no cakewalk for one to indulge in such transactions and they would think twice before going ahead,” says Pratik Mehta, the managing director of Unishire, a developer in Bangalore. “Small developers who engaged in cash will find it difficult and are likely to wipe out. However, organised developers with streamlined processes and corporate governance will not face any problems. Another significant benefit is maintenance of clear land titles. This would lead to better financing in the sector by foreign investors due to more transparency and better valuations.”
There are several factors that have driven the benami market, as land has become much sought after in many parts of the country.
“Acquisition of real estate in India is governed by several central and state laws such as laws which prescribe an upper limit to the size of land holding by an individual or laws restrict non-agriculturists or non-tribal persons from acquiring agricultural and tribal lands,” says Abhishek Sharma, a partner at Khaitan & Co, an Indian law firm. Benami methods therefore have been used as a solution.
He adds that it remains to be seen whether the expansion of the benami act to increase the categories of exempted transactions will be applied retrospectively.
Urbanisation has been a significant factor in driving the growth of benami land deals.
“Any property in future which could turn into a developable or urban asset and there will be a huge demand to change it from a regular to benami land,” says Gulam Zia, the executive director at Knight Frank India.
Cities such as Mumbai, Bangalore Delhi, Hyderabad and Kolkata have been the focus of such activities.
“Urbanisation is the reality which multiplies the value of the land from almost zero to 50 times or 100 times over in a period of a couple of years.”
Many stakeholders in the property market are “losing sleep”, he says.
“All of them who are sitting on benami properties are extremely concerned about what will happen to their land parcel if it is restored to the original owner, because it is currently in someone else’s name. That will have a serious impact.”
The government is focused on targeting benami property in India at the moment. But experts say that attention will eventually turn to properties that have been purchased overseas using black money.
“Indians do engage in such transactions abroad, especially in countries like Dubai, Singapore, Malaysia,” says Mr Raheja.
Mr Zia warns that “in future there are clear indications they will run after all of them who are holding properties in different global markets and make them declare those properties so that the Indian government can actually properly tax it. The way the current government is cracking the whip, I’m sure reaching out to investment in properties abroad will be the next logical step. It’s already written on the wall.”
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Updated: December 3, 2016 04:00 AM