Contributed by Bhaskar Vishwajeet (affiliated with GBLR-SCCLP)

Introduction

In December 2022, the Maharashtra government awarded a prominent developer with the development rights to the Dharavi Redevelopment Project in Mumbai. The Dharavi Project – which promises to urbanise the slum dwellings in the area – was close to 19 years in the waiting as the initial plan from 2004 had never taken off. With a successful project bid, the developer can now inject ₹12,000 crores into the redevelopment of the area through its SPV for the Project.

Interestingly, the Transfer of Development Rights (TDR) concerning the Project has grabbed attention. TDRs are rights given to landowners whose property is acquired for city infrastructure projects, allowing them to sell or develop those rights to build beyond the Floor Space Index (FSI) restrictions imposed on them. The Maharashtra government recently amended the Development Control Rules (DCR) to remove indexation from the TDR applicable to the Dharavi Project area. Indexation is the process of imposing conditions on the setting of a purchase price for some property. This means that the TDR generated from the Project will be available in equal measure for application in other specified areas where real estate prices may be expensive. There is no cap on the area-specific usage of TDR as such. Therefore, if 1000 square feet of TDR is generated from the Dharavi project, 1000 square feet can be utilised in some other area. Additionally, real estate developers must mandatorily buy 40% of the Dharavi Project’s TDR.

While there are allegations concerning the improper removal of the indexation norms, there is a far more significant issue concerning TDRs. TDRs suffer from uncertain pricing and valuation. India’s Niti Ayog notes that the economic value of these ‘awards’ by statutory authorities is disputed and, as a result, amendments or notifications that enable a TDR package to go beyond the average Ready Reckoner (circle rate) rate are bound to hurt other development projects and push prices for consumers.

The author aims to highlight the problem with valuing TDRs and suggests a regulatory mechanism to ensure organic pricing (dictated by standard demand and supply) through a process that considers the stakeholders involved in the real estate market.

TDRs and Pricing – Status Quo 

Suppose a land or property owner is compelled to relinquish their property to the government or a governmental agency for initiatives like road widening, creating new roads, or developing parks, playgrounds, and civic amenities according to the government’s plan. In that case, they become eligible for Transferable Development Rights. Typically, the town planning legislation is amended to include a provision for TDRs. In Mumbai’s case, the Maharashtra Regional and Town Planning Act 1966 enables TDRs. This is an alternative to the compensation measures available to landowners through the compulsory acquisition process (eminent domain) prescribed in Section 16 of the LARR Act 2013 (“LARR”).

The awarded TDR comes in the form of a Development Rights Certificate, which the landowner can utilize personally or transfer to another individual. The DRCs are allocated based on development zones, to be determined by the issuing municipal authorities (competent authority). These zones typically range from intensively developed (Zone – A ) regions to sparsely developed (Zone – C) regions. Slum dwellings also constitute a zone in many designated TDR policies and are often the subject of heavy construction activity.

The open market principle wholly dictates the pricing of TDRs. That is to say, developers determine the price of TDRs through general demand and supply. Developers may adopt anecdotal methods, as  no institutional pricing mechanism exists. Furthermore, governments do not play a role in the pricing process.

An informal pricing process dictated by demand and supply, when combined with swelling circle rates, registration charges and allied property acquisition or transfer costs, increases consumers’ hardship as developers transfer the costs to them. In Maharashtra for instance, the Ready Reckoner rate (circle rate) went up by 8.8% in 2022. This has had a commensurate effect on the project cost and apartment rates have shot up. There is some respite with no revision of the same in 2023. Meanwhile, as enabled through the notification, the Dharavi Project TDR allows the developer to charge up to 90% of the circle rate of the receiving plots (the land on which the TDR is utilised) under the TDR. Many claim this to be an arbitrary metric.

The Utility of TDRs and the TDR Market

Because TDRs are essentially compensation for the compulsory acquisition of land, the issuing authority grants FSI credits to set-off any notional losses to the owner. FSI credits allow building beyond the FSI restrictions imposed by statute. Thus, developers or landowners willing to build extra or redesign their plots based on larger dimensions than before may use the awarded TDRs to do so. For example: Recently, the Brihan-Mumbai Municipal Corporation scrapped a deal with DBS Realty to construct housing for project-affect people as DBS Realty failed to transfer the title to the project land to the BMC. The deal included credit notes – a credit instrument backed by the competent authority that could be monetised further to recoup expenses by the developer – in addition to the TDR. DBS Realty had received FSI credits as a part of the TDR.TDRs were awarded herein to incentivise the developer to build social housing projects in exchange for extra development rights on other projects.

Due to the promising value of a TDR, developers trade in them with great interest, thereby creating a local market. In Gurugram, for example, developers are acquiring land from farmers to create public infrastructure by building wider roads. The farmers have received TDRs in exchange that can be further monetised through trading on government portals. The monetised TDRs are to the tune of ₹15-16 crores.

It is evident that the value of TDRs, combined with the volume of trading among the developer community, indicates the existence of regional markets. The problem begins when such regional markets are riddled with practices like informal trading rates and disproportionate (relative to different regions) circle rates and registration charges.  It has been observed that such practices contribute to the uncertainty concerning TDR pricing and valuation. Nillson reiterates this limitation in the global context by stating that there is no standardization for TDR mechanisms in the United Kingdom.

Back home, the average TDR rate before the Dharavi Project TDR was 30-60% of the circle rate. This has shot up to 90% – the most expensive. The result is that property rates in other areas will go up because the developers holding the Dharavi Project TDR will prefer to monetise the same to realise gains on projects in other areas. The monetization of the TDRs will be carried out by adding the TDR cost to the project price, thereby transferring extra costs to the consumer, making them pay higher prices for a flat or plot. To describe this numerically, imagine a plot that retails for 100 rupees per sqm. The Dharavi TDR is 90% the price, therefore, the cost goes up to 190 rupees per sqm.  

Additionally, landowners are often apprehensive about the true value of the TDRs received. In the days before the LARR Act, the people of Bangalore were sceptical of the promised return on TDRs in exchange for their land titles. The TDRs offered by the BBMP in Bangalore were not fetching a proportionate return for landowners. Some claimed that property worth ₹2 crores fetched no more than ₹10 lakhs with the TDR.

As a result, the TDR trade-pricing mechanism(s) needs to be assessed and regulated for better incentives and spur demand in markets that are lost when it comes to the true value of the instrument.

Proposed Regulation and Concluding Notes

We have established that there are regional markets for TDRs where municipalities are empowered to offer the same as an alternative to the compensation under the LARR Act. Additionally, multiple state governments have conceptualised online trading platforms to enable easy access to TDR trading between parties. This process is however not uniform and many regions need more digital infrastructure for online trading of TDRs.

The author suggests the creation of a regional exchange(s) for trading TDRs. This can be achieved by creating digital exchanges for regions where TDRs are on offer through municipal schemes. This is similar to the erstwhile regime of regional stock exchanges. As of writing this piece, only one regional stock exchange remains, i.e., the Calcutta Stock Exchange, but that is a collaborative effort with the National Stock Exchange (NSE).  the idea of a regional exchange is predicated on the logic of providing a platform for stakeholder engagement and institutionalising the localised (to a region) engagement through rules and some oversight mechanism. China has dabbled in such a formulation through the Chongqing Country Land Exchange, a prefecture-scaled land quotas trading market. We can see traces of this concept in the trading bank for TDRs in Hyderabad.

Localised TDR exchanges will establish a formal institution for price discovery, theoretically improving the chances of liquidity. The informal trading price in current TDR markets will be streamlined through relatively better mechanisms as the fundamental function of an exchange is to track real-time supply and demand for a security/commodity. For instance, the NSE’s Municipal Bond Index, provides a real-time index of the country’s 28 municipality-offered bonds, providing a certain estimation of the demand and supply of municipal bonds.

Furthermore, TDR exchanges will need to be overseen by a regulatory agency. Niti Ayog’s policy note on TDR proposes a regulatory agency at the state level. One of the proposed functions of the regulatory body is to set a minimum base selling price for the DRCs. The author agrees with Niti’s proposal. The proposed TDR regulation body can operate like the Securities and Exchange Board of India, the capital markets regulator. The only difference is that the proposed regulator will have a limited mandate to regulate pricing and trading of TDRs/DRCs. Stakeholders in TDR markets can be involved in the consultation process by soliciting comments on TDR Policies or draft notifications. A regulatory agency for TDR markets will greatly address the problem of lack of government control over TDR trade pricing.