How the politician-builder nexus really works

Owing to the lack of a transparent political funding system, India's politicians are rich in cash and the need for this kind of money in real estate makes them perfect partners for property developers. Robert Vadra's dealings with DLF offer a perfect example of how this politician-builder nexus works.

Politicians accumulate resources while in office and then require a place to invest it where they can avoid public scrutiny while earning a decent return. Because land is a valuable commodity, many politicians deposit a portion of their assets with developers. Builders then transfer back the assets to politicians which can be used to offset election expenses.

These politicians, bureaucrats, big builders and the land mafia control the real estate market in most metros to the point where no genuine buyer can really afford to buy a home. And it is this very nexus that ensures prices do not crash as it would wipe out the value of their slush funds.

Here are four ways in which politicians jack up property prices for the mango people:

1. A big chunk of a politician's money goes towards acquiring land or property. Politicians, through developers, pick up land where they have inside information. A Delhi-based real estate expert told Firstpost that Vadra and the son of an important Delhi politician are rumoured to have picked up large parcels of land around the upcoming Kundli-Manesar-Palwal (KMP) Expressway.

This area, where development began barely six to seven years ago, has now developed into an attractive destination. However, the duo picked up land even before the government had announced the master plan. Land in proximity to the expressway was to become the next big site for commercial and residential developments.

Getting a flat allotted under the discretionary quota of governments is commonplace and beneficiaries include kin and friends of politicians.

Take the case of Congress MP from West Delhi Mahabal Mishra. According to reports, Mishra helped his brother acquire prime land in Delhi. Mishra is said to have pleaded for a huge plot of premier land in Dwarka to be acquired by the government, then asked for some of the acquired land to be denotified, and ironically, his brother, a realtor ended up striking a deal for the denotified land too. (You can read the entire report here)

The biggest scandal was Adarsh Housing, when various Congress politicians, including Ashok Chavan, acquired apartments for themselves and/or their family members when the land was actually approved for Kargil war widows.

Land scams began in a major way in Maharashtra during the chief ministership of Sharad Pawar as he would dereserve prime plots for certain beneficiaries. One major scandal was the dereservation of the Vasai-Virar green belt into a residential zone, by which thousands of acres of land were freed for housing. Pawar was followed by others, who saw huge money in real estate. Shiv Sena leader Manohar Joshi, who was the chief minister from 1995-1999,lost his job because of adverse court observations about how he favoured his son-in-law, a builder, to construct a township in Pune .

 How the politician-builder nexus really works

A politician will hand over Rs 100 crore to a builder for expansion, which will be returned to the politician once the project starts generating cash through sales to either investors or buyers. AFP

A Tehelka story rightly says, "Virtually everybody from top to bottom is on the gravy train and works overtime to provide illegal gains to realtors, rather than acting as custodians of public interest."

Secondly, these politicians use several trusts as front companies to invest in real estate through the backdoor route. Several so-called educational institutions have been built by politicians with their slush money and a veneer of legitimacy is sought to be introduced in their wake. They are attracted to this as they can get huge amounts of land allotted to them in the garb of constructing an educational institution and more black money can be utilised in constructing the buildings and other facilities.

"Once they come to power, they can easily tweak the rules, and the land that was once allotted for a hospital or an educational institute will soon be used for residential or commercial purposes. As long as the asset is not in his name or his family's name, nobody can touch the politician. It is only when he leaves a trail does he get caught," the Delhi-based investor told Firstpost.

The third and the most used model in the Delhi-NCR region is a direct black transaction. A politician will hand over Rs 100 crore to a builder for expansion, which will be returned to the politician once the project starts generating cash through sales to either investors or buyers. And this is why loans and advances have been a common industry practice to grow the business, especially of those operating in the commercial space such as offices, hotels and malls.

A Business Standard report pointed out that most large real estate projects are developed through joint ventures or special purpose vehicles either to mitigate risks or regulatory restrictions on land ownership and provide loans or advances to joint ventures and subsidiaries as start-up capital.

But in order to ensure the politician gets his cash and return on investment, builders use brokers and underwriters to use property as tradable commodities.

A builder can easily sell flats to investors at a token price of Rs 5 lakh for a Rs 1 crore property before the construction of a project begins. While the allotment of the flat would be in the name of the investor, thegeneral power of attorney (where the buyer gets a GPA from the seller not only for his own use of the property, but for further 'sale' to someone else if he so desires) ensures that the name of the buyer remains blank in the document, thus allowing the investor to sell the property further when the property appreciates in the next couple of months.

This is probably how Vadra made massive profits by buying several DLF flats in the pre-launch phase. A report in The Economic Times today highlighted that Vadra used part of the Rs 65 crore security-free loan from DLF to book 41 apartments in three of the company's premium projects: Aralias and Magnolias in Gurgaon and Capital Greens in Moti Nagar in Delhi in the pre-launch phase and has already sold 38 of the those flats at a profit. Basically what this means is he used the DLF money to strike bulk deals at throw-away bargains when projects were launched, and resold the flats at a higher price.

But how does a politician manage to increase his wealth over five times while an investor at best can only double his gains? " This is because investors come into the picture only at the marketing stage while the politician enters at the time of conceptualisation and manages to alter laws to suit his needs," said the same Delhi investor on condition of anonymity.

And fourth is the white money transaction. The politician or bureaucrat's illegal income is handed over in cash to a money launderer who deposits an equivalent sum in foreign exchange in Mauritius or some other tax haven, where it becomes perfectly legitimate. A company is then formed in the tax haven which invests the politician's money in a real estate company in India as FDI. " You think it is the India growth story that is attracting foreign funds to invest in realty? It is Indian black money coming back to India as white money," a Mumbai-based developer told Firstpost on condition of anonymity.

The politician here also gets preferential shares in the company at a low price. When he needs his money, he can sell the shares at market price. In other words, the realty company is just a front which functions as a bank for the politician. From getting money from developers during elections, these politicians soon started investing with developers, who became their bankers.

The Benami Transactions (Prohibition) Act empowers investigating agencies to summarily take over a property if it is proved to be 'benami', or is nominally in a particular person's name while having been paid for and actually belonging to another. But with politicians and bureaucrats themselves the biggest offenders, the act, passed in the 1980s when Rajiv Gandhi was prime minister, has never been enforced rigorously.

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Updated Date: Dec 21, 2014 04:55:20 IST