REAL ESTATE FRAUDS IN INDIA INSIGHTS

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1 REAL ESTATE FRAUDS IN INDIA INSIGHTS

2 Foreword Real Estate sector in India constitutes close to 11% of the GDP and a significant portion of black money in India is parked in real estate assets. Corruption is rampant in this sector specifically with respect to acquisition of agricultural land and its conversion for residential and commercial use and for obtaining Government clearances for construction. The Urban Land Ceiling Act, coupled with foreign investments and tax holiday policies of the Government had also had a domino effect on corruption and black money in this segment, with people buying properties in bulk and selling at inflated prices leading to property inflation. The Government s recent action on reducing the supply of black money through Demonetization along with reforms such as RERA (Real Estate Regulation Act), REITs, and Benami Transactions (Prohibition) Amendment Act, 2016, would go a long way in bringing transparency to this beleaguered segment. What remains to be seen is will India see -a rise or fall in Real Estate & Construction Fraud post de-monetization, or - will previous trends continue, or - would we see new trends emerging in this sector?

3 Industry take on Demonetization Here's how some of the industry participants reacted to the current demonetization move. Name Entity Comments Mr. Niranjan Hiranandani Mr. Getamber Anand CMD, Hiranandani Communities and Founder-President NAREDCO (Maharashtra) President, CREDAI National This effectively is a major assault on black money, fake currency and corruption, is good for the economy and real estate - we welcome the move Effectively the primary market will not be very disturbed as the inventory was sold to end users who avail home loans. Moreover the organised part of the RE industry has always been compliant and it is only the unorganised fly by night players who will be affected. This move will help industry to fight more effectively for removal of Section 43CA of the IT Act as now there is no reason to charge tax on so called deemed income to both the buyer and seller post this move. Mr. Vineet Relia Managing Director, SARE Homes This is a very bold move taken by the Government and we truly support the decision of moving towards cash less economy. The move will have a major impact in secondary sales especially in the high value segment. We feel that RERA plus this move will heap huge benefits in the long term

4 Demonetization Impact Segment Comments Impact Residential real estate This segment is largely controlled by home finance players, and deals are mostly transparent in nature. Tier 2 & Tier 3 cities where cash transactions are normally done will see a business crunch. Secondary resale market impacted. Low Commercial real estate Office/Industrial leasing transactions least affected relatively low cash transactions Low Real Estate investment markets Retail real estate Land sales and leasing Developers Hotels and Hospitality related Informal cash funding post demonetization will be affected, opportunities rife for institutional capital, FDI, Private equity, and debt market. Land prices could be driven down if banks initiate funding. Reduced cash transactions lead to sizeable impact, which includes the Luxury segment, in the long term credit/debit cards could reduce the impact. Direct land deals and agricultural land deals which involve cash remain affected (sans realm of JVs, JDs, and corporate divestments) Minimal impact on large institutionalized players, as sales driven by salaried or investor community, high impact on small developers due to cash dependence, impact of RERA will further impact the industry positively. This being an organized sector will see very low impact. High High Low

5 Challenges in Real Estate Due to legislative reforms in RERA (Real Estate Regulation Act), REIT (Real Estate Investment Trust), and Benami Transactions (Prohibition) Amendment Act, 2016 and reforms in FDI norms one can expect more transparency in the long term in the real estate domain. Bribery and corruption remain key challenges to conducting seamless business in the construction and real estate sector in India. Some of the key frauds affecting this industry has been tabulated below. Type of Fraud Modus Operandi Impact Theft or substitution of Materials Taking material from the work site for personal use or using low grade material than quoted. Bid/Contract rigging Suppliers in the market collude to fix prices or direct customers to use certain contractors. High False representation Bribery Corruption This might involve using undocumented workers, falsifying minority content or daily reports, quality test results. Collusion between two or more parties entering into a secret agreement whereby financial incentive is made for securing a particular outcome (awarding of public or private contract or purchasing property on favorable terms. High

6 Challenges in Real Estate Type of Fraud Modus Operandi Impact Money Laundering Activity undertaken to legitimize money gained illegally. Acquiring real estate (including making down payments) in cash and selling at a later date through banking channels to give a legitimate origin to the money invested. Tax Avoidance Tax avoidance by paying wages in cash to the site laborers. High High Fictitious Vendors Billing Fraud Change order manipulation Created by falsifying payment applications, covering up the purchase of personal items or diverting money to a ghost company. Overstating the amount of labor, materials and other equipment required to complete a project. Diverting lump sum cost to time and material cost by initially budgeting expenses as a lump-sum then billing for time and materials related to change orders. Low

7 How can we help? Valueonshore Advisors helps you collate field investigation results with internal reviews to help mitigate the following factors: Financial Losses Inventory Losses Incidences of Kickbacks and Commissions Supply Chain mismanagement Employee fraudulent misappropriations

8 Contact Us To know more about the firm, please visit or contact any of our offices below: Valueonshore Advisors Delhi NCR 5th Floor, Mawandia Towers, 463, Phase V, Udyog Vihar, Gurgaon Tel : info@valueonshore.com Valueonshore Advisors Singapore 29 Mayo Street, #03-03, Singapore Tel : info@valueonshore.com Valueonshore Advisors Mumbai 418, 4th Floor E Wing, Tex Centre, Chandivali Farm Road, Andheri (East) Mumbai Tel : info@valueonshore.com anirban.banerji@valueonshore.com