The Ministry of Electronics and Information Technology released a notification on 26 September through which eSign or Digital Signature Certificates can now be used for all property transaction documents such as sale, lease, and mortgages. A few weeks before this notification, demat accounts in Indian equity markets crossed 100 million. On the surface, these two developments seem disconnected. However, they are the same phenomenon at work—dematerialiation of securities is an example of the remarkable reforms that India began in the mid-to-late 1990s. The eSign notification takes us one step closer to a more vibrant market for immovable property.
Why does this matter?
An asset’s value is unlocked if there is a clear title to it and if there are minimum frictions in its sale and purchase. Electronic records through the dematerialisation of shares and the rationalisation of stamp duty made a substantial difference to equity markets.
Frictions, however, continue to exist in land markets. Restrictions on the transfer of land and poor ecosystem of land records are some of the factors that have held back market growth. Transfer restrictions imply that there is no liquidity in land markets as land of one type and designated for a specific use, cannot be easily sold for another purpose. Keeping the land locked into one use dilutes its value.
It also leads to rent-seeking as entities scramble to change land use. If one doesn’t have a conclusive title to the property, it becomes a hurdle in sale transactions. A buyer needs to make considerable investments just to check the sanctity of land records. This increases the cost of each transaction.
Poor records also have downstream effects on the ability to get credit, as the land cannot be easily used as collateral. Finally, the requirement of signatures on physical documents increases the cost of maintaining such records and transacting in land. It is, therefore, no surprise that even though real estate accounts for a large chunk of household portfolio in India, monetization of land is still very low.
Slow but steady reforms
In India, the story of equity reforms has been led by well-drafted legislation, institutional depth and extremely high-quality human capital that was not afraid of taking risks. Equity reforms did not fall prey to the usual “jaldbaazi” or the haste of the policy process in India. It followed the policy pipeline that is required so that the reforms do not fall down like a pack of cards, or laws and policies have to be constantly tweaked because the foundations have not been laid down ahead of time.
Even though a start has been made, this confluence of factors has yet to come together in the space of land markets.
Of course, the political economy in land is more complicated than in equity. A significant step towards reform was taken by the Digital India Land Records Modernization Programme (DILRMP) (the erstwhile National Land Records Modernization Programme). The goal was to achieve more accurate land title records so that disputes on land titles could be resolved and ultimately reduced to a bare minimum. While progress has been made, there are still gaps, and variation across states.
With e-signatures now allowed for immovable property, it should help lower transaction costs in the home-loan and loan against property markets. With electronic records and e-signatures, the number of friction points have come down. But we still have a long way to go in the way land-use laws are framed. The process of registration of property still requires physical presence at the office of the sub-registrar. There may be important reasons for physical presence clause because it is a better guarantee of neither party being coerced into the transaction. But in a digital world, we need to find better mechanisms that ensure consent for transfer of property.
Policy reform pipeline
Dematerialisation of shares began in 1995. It was in 2019 that the final amendment that led to a neutral stamp duty regime for all securities across the country fell into place. The policy process has led to various improvements in the intervening years, and one hopes that it will continue to do so.
There are important lessons that land markets can draw from the equity market reform story and from human capital inside institutions such as SEBI, Ministry of Finance, and the National Stock Exchange (NSE). Land markets are more challenging, especially because substantive reforms mostly lie in the domain of states, and the Union and state governments have to work together, making it even more important to continuously chip in at the policy reform pipeline.