Govt's money laundering crusade looms over India property bubble

The biggest beneficiary of black money in India is the real estate sector, says Samir Arora, founder of Helios Capital Management

Siddharth Sharma, an aviation consultant, was looking to buy an apartment near New Delhi. Of the eight projects he viewed, developers of three expected part payment in cash, an illegal but common demand in India. "With my salary, I don't generate much cash," said Sharma, 43. "For me, to cough up so much was impossible."

The practice of investing in real estate with untaxed income or unaccounted wealth is widely prevalent in India. That could change if Prime Minister Narendra Modi has his way. His government is planning a new Bill to curb "black money" that has inflated property prices, narrowed options for buyers like Sharma and kept homes beyond reach for many.

Finance Minister Arun Jaitley told lawmakers on February 28 he plans to introduce a revamped version of a lapsed Benami Transactions (Prohibition) Bill in the current session of Parliament. Benami means anonymous, and such deals often involve concealing the identity of the true buyer or the seller.

First pillar
"The first pillar of my tax proposals is to effectively deal with the problem of black money which eats into the vitals of our economy and society," Jaitley said, adding, "This law will enable confiscation of benami property and provide for prosecution, thus blocking a major avenue for generation and holding of black money in the form of benami property, especially in real estate."

Data provided by Mumbai-based Liases Foras Real Estate Rating & Research Pvt Ltd show the real estate sector accounts for a large share of illicit deals, with an estimated 30 per cent of transactions done with black money.

That's high for a sector making up six per cent of India's $1.88 trillion economy and for an industry forecast to grow five-fold to $676 billion by 2025 and 13 per cent of GDP by 2028, according to KPMG.

If enacted, the law could mean a "healthy" correction to property prices, said Samir Arora, founder of Helios Capital Management Pte Ltd, a Singapore-based hedge fund.

Tough rules
"The biggest beneficiary of black money in India is the real estate sector," Arora said. "The government looks serious on this Bill. Once you make the rules tough, somebody will get caught. When a few get caught, others will freeze."

For land deals, the cash component could range between 30 per cent and 50 per cent of the deal value, said Pankaj Kapoor, founder of Liases Foras. Politicians and businessmen hold a lot of land as they expect asset appreciation, Kapoor said, adding, "If black money goes away, property prices could see a sharp correction."

The S&P BSE Realty Index, comprising 13 property stocks, has dropped 87 per cent from a high in January 2008 as developers grappled with debt, high interest rates and declining sales after the global financial crisis.

Unitech Ltd led the slump during this period, tumbling 96 per cent while DLF Ltd slid 86 per cent. Unitech dropped 3.3 per cent on Thursday in Mumbai, the most in a week, while DLF slipped 0.3 per cent.

The proposed Bill will seek to prohibit accepting cash of Rs 20,000 and above for the purchase of immovable property while buyers will have to provide their income tax identification numbers for property transactions exceeding Rs 100,000.

Easy play
"In principle, the more checks and balances they bring, the better for the industry," said Rohit Gera, managing director of Pune-based Gera Developments Pvt Ltd.

The prevalence of unaccounted wealth being pumped into real estate is more acute in land deals than in housing, said C Shekar Reddy, president of Confederation of Real Estate Developers' Associations of India. "Where developers are concerned, I can say black money in residential transactions is almost nil," Reddy said.

The passage of the Bill hinges on Modi's ability to push it through the Upper House of Parliament, where his Bharatiya Janata Party lacks majority.

Long wait
After the government failed to notify an original law in 1988, another version of the Bill was introduced in 2011, which lapsed a few years later. That draft recommended jail terms ranging from six months to two years and a fine of 25 per cent of the fair value of the property held in "benami".

The government's efforts to tackle unaccounted wealth aren't just confined to domestic black money. The cabinet this week approved the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, which will target citizens with secret overseas bank accounts.

India ranked third in the world for money illegally moved overseas in 2011, behind China and Russia, according to a 2013 report by Global Financial Integrity, a Washington-based group researching cross-border money transfers.

Modi's avowed intent to unearth black money was a key campaign pledge that helped him win the largest electoral mandate in three decades.

India's real estate sector, which opened to overseas investors in 2005, has got inflows of about $10.5 billion, which is about 5 per cent of the total foreign direct investment in the country, according to KPMG

As for Sharma's search for a suitable property near New Delhi, he says he hasn't seen a happy ending yet.