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LATEST NEWS UPDATES | Black money became a reality in realty sector by Nauzer K Bharucha

Black money became a reality in realty sector by Nauzer K Bharucha

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published Published on Nov 12, 2010   modified Modified on Nov 12, 2010

We are a cash-rich company run by professionals,” says a smarmy 30-something Mumbai-based head of a leading real estate company. His company’s exponential growth in the span of just five years has raised eyebrows in industry and banking circles. The reasons are clear.

The company is known to have tremendous clout in the corridors of power and with the builders’ lobby. It is backed by several important politicians in Mumbai and Delhi.

The sons of “two senior ministers” have a stake in it. The sons of at least three IAS officers are gainfully employed by this company. An insider admits with rare candour: “There is an infusion of unlimited funds in this firm and the money belongs to these politicians . No doubt, it is growing rapidly''.

The nexus between politicians and builders in Mumbai's lucrative property market has been known about for decades. But more recently, politicians themselves have become builders and now operate through real estate companies. Their modus operandi is not particularly complex.

“Politicians send their ill-gotten wealth abroad through the hawala route. It then comes back again from front companies floated in Dubai and Mauritius , which then is pumped into such real estate firms in the form of foreign direct investment,” says a knowledgeable source within the property market.

Early this year, the income tax department raided the offices of a real estate company and, it is alleged, found unaccounted income of Rs 350 crore. It’s learnt that the money was paid to a Union minister and a bureaucrat who was once posted at the Mumbai municipal corporation. “Bureaucrats and politicians complement each other. The former clears project files while the latter brings in the business through developers,” says housing activist Chandrashekhar Prabhu.

“Earlier, politicians used to get money from developers during elections. Later, they started investing with the developers, who became their bankers. Today, we find that several of these big real estate companies are just a front for politicians ,” he says. Prabhu alleges that every politician has a favourite set of developers to whom he turns to launder his money.

Historically, black money became a reality when unrealistically high income tax rates were slapped on people. Those trying to save some of what the taxman would take, invested instruments like real estate. In the 1970s, builders used to take 80% in cash and 20% as a cheque from property buyers. A decade later, it was 60% cash and 40% as a cheque payment. That was after tax rates were lowered.

Today, the amount of black money that changes hands has reduced still further but many builders continue to demand a substantial part of transaction costs in cash. This could be anything between 15% and 40% of the value of the property. The good thing though is that most big developers and reputable real estate firms are willing to process a transaction with cheque payments.

Even so, say sources, cash payments are the norm when it comes to all large land transactions in the city. “When a developer claims he has bought land for Rs 500 crore, there is a strong possibility that he has undervalued it by at least Rs 100 crore,'' says a source.


The Economic Times, 7 November, 2010, http://economictimes.indiatimes.com/markets/real-estate/realty-trends/Black-money-became-a-reality-in-realty-sector/articleshow/6885307.cms


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