The only way to ensure a modicum of good corporate behavior in India, legislators are learning, is to make tough laws that protect the party whose money or trust is vulnerable to abuse.
The consumer ``shall be the king," India's urban development minister assured parliament as the government secured a rare upper house victory for a bill to regulate the country's real-estate industry.
Venkaiah Naidu's promise may not be empty. The country's builders are notorious for duping home buyers with delays, shoddy construction and broken promises. The new law will, among other things, force developers to set aside 70 percent of their clients' funds in an escrow account and use that sum only for the project at hand. In the short run, this could worsen the industry's liquidity challenge:
But the hiccups won't detract from the longer-term benefits of greater transparency. Details of even tiny development projects will have to be disclosed. Every Indian state will have a real estate regulator. If they do their job well, fly-by-night operators will disappear. Once they finish deleveraging, the larger players, such as DLF, Oberoi Realty, Godrej Properties and Prestige Estates, could become bigger.
Regulation alone won't be enough to make home buyers less suspicious of the industry, however, if the basic legal framework is too weak to protect the vulnerable.
One parallel is with banking, which is tightly supervised by the the central bank. Yet state-run Indian lenders are only now waking up to the loan losses amassed by Kingfisher Airlines, which stopped flying in October 2012. Suddenly, there's hectic activity by 17 of them to recover what they can of the 90 billion rupees ($1.3 billion) of unpaid debt from the carrier's flamboyant founder Vijay Mallya.
The banks' scramble shouldn't shift attention from their own role in making loans against woefully inadequate collateral. The Times of India recently reported that lenders had been seeking buyers for the airline's brands and trademarks since 2014. They're unlikely to meet with greater success trying to enforce Mallya's personal guarantees. At a minimum, there will have to be a legal battle before creditors come close to helping themselves to the liquor and beer tycoon's wealth, including a $75 million settlement offer he recently got from Diageo, and his unpledged shares in India's largest beer company.
Clearly, laws with teeth should have been in place before the loans were made. Because they weren't, India is left with the spectacle of banks petitioning the Supreme Court to restrain Mallya's movements, only to be told that he had left the country a few days ago. (He says he's not absconding, and is making efforts to reach a one-time settlement with the banks.)
The Kingfisher episode is a lost cause. The new real-estate law, in contrast, spells out jail terms for breach of promise. Naturally, the builders are unhappy. But this really is the only way to get some decency back into how India Inc. behaves.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Andy Mukherjee in Singapore at firstname.lastname@example.org
To contact the editor responsible for this story:
Paul Sillitoe at email@example.com