LEGAL ASPECTS OF CORPORATE GOVERNANCE IN THE REAL ESTATE SECTOR

Palak Verma, Student, O.P. Jindal Global University

Abstract:

Corporate governance is a set of rules that ensure efficient management, leadership, and control. The management (Agent) is held accountable for corporate performance and returns to investors (Principle). Specifying the rights and responsibilities of these two groups creates a structure for setting company objectives and monitoring performance. 

The Indian real estate industry is one of the country’s largest sectors, second only to agriculture and the primary sector, accounting for 6.5% to 7% of job creation in India’s unorganised labour market. However, the real estate sector in India faces systemic challenges such as delayed projects, financial mismanagement, legal regulatory loopholes, and corruption and unethical practices.  Thus, Corporate Governance is a crucial part of real estate-related companies. These mechanisms promote transparency, safeguard stakeholder interests, and encourage sustainable business practices in a well-governed corporation. 

This article will attempt to critically analyze the legal aspects behind corporate governance within India’s real estate industry. And also, advocate for Transparency in Financial Transactions and Stakeholder-Centric Governance mechanisms that extend beyond traditional corporate governance norms, based on the implication of regulatory frameworks, judicial pronouncements, and considerations of ethics. 

Keywords: Corporate governance, real estate, RERA, Companies Act 2013, ESG, transparency, accountability, regulatory oversight.

Legal Frameworks Governing Real Estate Corporate Governance

1. The Role Of RERA-

The legal provisions in the Real Estate (Regulation and Development) Act, 2016, have attempted to mitigate such issues as RERA provides for registration of projects, disclosure of details, and completion within the stipulated time frame, thereby keeping buyers accountable. It allows the regulatory authorities to punish erring parties. However, the effectiveness is strictly a function of enforcement and structural dynamics in the sector. For example, Developers must obtain numerous approvals to make a project RERA-compliant. The lack of a single-window clearance system requires developers to seek multiple permissions, which can delay project completion., 

The act protects buyers primarily but provides little cover for other stakeholders such as financial institutions and minority shareholders. Judicial interpretations have found it difficult to balance competing interests. As noted in Neelkamal Realtors Suburban Pvt. Ltd. v. Union of India and Ors., (2017) and Aftab Singh v. Emaar MGF Land Limited & Anr., (2017), RERA imposed significant obligations on developers whilst protecting homebuyers.

2. SEBI Regulations on REITs

Real Estate Investment Trusts regulated by SEBI provide an institutional framework for investment and governance. The regulations attempt to standardize practices and ensure transparency in the management of assets. SEBI regulations, therefore, emphasize investor protection with operational lapses taking the form of inflated valuations and misapplication of funds entirely avoided but while such regulations are comprehensive, effectiveness largely depends on strict enforcement and continuous monitoring.

3. Company Law and Minority Shareholder Rights

The Companies Act, 2013, requires directors to exercise fiduciary duties (Section 166) and The incidence of mismanagement of funds and opaque dealings makes this provision very relevant to real estate. This includes good faith and an avoidance of conflict of interest.

Shareholders, including minority shareholders, enjoy the right to vote and can challenge decisions that would have adversely affected their interests (Sections 43 and 47). As the investments are typically large-scale real estate ventures, financials need to be disclosed and shareholder consent is required for significant decisions.

However, governance mechanisms in the real estate sector generally become symbolic rather than substantive, even with the robust framework that the Companies Act provides. This is because the Enforcement agencies, which include the Ministry of Corporate Affairs, do not have the resources to monitor all the firms effectively. This gap is also strengthened by judicial delays as the legal recourse for violations such as shareholder disputes or whistleblower retaliation, is generally lengthy due to backlogs in Indian courts.

Opacity in Financial Transactions

The Indian real estate is highly dependent on unaccounted or “black money,” which has been seen to severely erode the very foundations of transparency and accountability that corporate governance is based on. Even after legislative interventions, such as anti-money laundering laws under the Prevention of Money Laundering Act, 2002 (PMLA)  and demonetization in 2016, the sector still suffers from financial opacity.

The PMLA, 2002, seeks to control money laundering by making disclosure mandatory for high-value property transactions. However, enforcement is still weak, and the real estate sector has become a conduit for illicit money flows. Studies have shown that there is a high frequency of undervalued property transactions, which allow tax evasion and cash payments that bypass legal frameworks.

This attempted to eliminate cash-based transactions through demonetization, but such measures are short-lived. Cash-based transactions returned to the real estate market, often through shell companies or informal agreements. The surge points to the failure of top-down reforms that fail to address the structural foundations of financial opacity. For buyers, cash dealings increase the risk of fraud and inflated pricing, while investors face challenges in assessing the financial health of real estate firms due to unreliable reporting practices.

The real estate sector’s dependence on black money exacerbates socio-economic inequalities. Wealthy individuals and corporations exploit systemic loopholes, while ordinary citizens face unaffordable housing markets and limited access to legal redress mechanisms. Thus, Financial opacity is particularly problematic to buyers and investors.

Environmental and Social Governance (ESG)

The intersection of environmental laws like the Environmental Protection Act (EPA) with the Indian real estate sector is a particularly daunting task as far as the enforcement of Environmental, Social, and Governance (ESG) principles are concerned. Despite being bound by rules against pollution and deforestation, India’s real estate sector generally indulges in such environmentally devastating activities that are causing huge displacement among marginalized sections largely due to weak implementation and lack of transparency.

Reports such as that from the United Nations Development Programme (UNDP) and the Global Real Estate Sustainability Benchmark (GRESB) indicate that, while increasing attention to ESG continues to gain prominence, especially since COVID, the Indian real estate sector is still catching up in terms of full deployment. This calls for a new paradigm that addresses those gaps, more so at a time when the sector significantly impacts the environment and communities.

Reforms

The establishment of a centralized real estate tribunal could help reduce inter-state variations in RERA implementation, ensure consistency, and reduce judicial delays. Ethical Governance Policies will include mandatory ESG disclosures and tying financial incentives to compliance, encouraging ethical conduct. It requires aligning governance with global benchmarks like the UN Principles for Responsible Investment. Governance models need to be elevated beyond shareholder primacy toward tenant rights, worker protection, and community welfare with a focus on inclusivity.

Conclusion 

The legal aspects of corporate governance in real estate firms are the subject of this article. It acknowledged the influence that governance laws have on society and how they shape industry. The real estate businesses’ strong governance frameworks are improving investor confidence, accountability, and transparency. Since it was in line with social norms and community well-being, the integration of ESG with corporate governance emerged as the main theme in real estate monitoring. But it has shortcomings that require a new framework as the legal framework, currently in place is foundational but far from adequate to deal with the systemic issues of opacity, inefficiency, and ethical lapses. The approach must be transformative: based on stringent regulation, robust enforcement, and stakeholder inclusivity. Through such an approach, India can position its real estate sector as a model of sustainable and ethical governance.