The construction industry, for recording whopping growth and for its immense potential for yielding profits, has been in the spotlight for over a decade now. It has not only attracted attention but also the opaqueness of the construction industry has paved the way for corrupt activities like frauds, bribery, embezzlement, coercion, etc. to enter into the system. Corruption not only increases inequality but also hampers the socioeconomic and political development in the country. This article deals primarily with the fraudulent practices in the construction industry, major Indian case laws, and the ways to combat such practices, as the Indian construction sector is already the second-largest employer in the country and if this industry is free from such menaces, the industry will play a significant role in the development of the country, rising national income and even raising the standard of living of the people.
The Indian construction industry encompasses majorly two segments i.e. real estate and urban development. The residential sites, offices, hotels, resorts, etc are covered within the term real estate and infrastructure for water supply, sanitation, transport, etc are covered under the urban development segment. This sector is a major employment driver.
The industry has assumed growing importance with the liberalization of the economy. The mammoth growth of the industry can be lucidly put forth by the report that states that the construction industry in India is expected to reach 1.4 trillion dollars by the year 2025.
However, it also attracts tremendous attention from miscreants in society who look at the malafide prospects of minting money by taking advantage of the loopholes in the systemic flow of money. Thus, the construction industry in India is not immune to fraud and other criminal activities in the background. Goons and politicians have made the construction industry a hub of money laundering which has further led to the creation of a kind of Infra-Terrorism. These activities do not take place in a vacuum without leaving their fingerprints on the society and economy at large. These illegal and fraudulent activities create an economic disparity in the economy leading to hyperinflation at times, which pave way for a highly unstable economy.
According to a survey report by Business Wire, the Indian construction industry is estimated to stand at USD 541543.9 million in the last quarter of 2021 and its growth rate per quarter is estimated to be as high as 15%. The numbers speak for themselves and it is evident that these figures are one of the highest in the world. India being a developing economy provides a high potential for the figures to go higher ahead with a lot of funds flowing through enroute F.D.I.
As infrastructural developments accompany growth in any economy, with the given rate of growth, the construction industry has gained momentum in India. However, it also attracts tremendous attention from miscreants in the society who look at the malafide prospects of minting money by taking advantage of the loopholes in the systemic flow of money. Thus, the construction industry in India is not immune to fraud and other criminal activities in the background. Goons and politicians have made the construction industry a hub of money laundering which has further led to the creation of a kind of Infra-Terrorism. These activities do not take place in a vacuum without leaving their fingerprints on the society and economy at large. These illegal and fraudulent activities create an economic disparity in the economy leading to hyperinflation at times which pave way for a highly unstable economy.
According to Murray (1958), the word “fraud” comes from the Latin word “fraus” which means deceit. In the Indian context, Fraud is a criminal act punishable u/s 420 of the Indian Penal Code, 1860. The said Section reads as:
“420. Cheating and dishonestly inducing delivery of property.—Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any person, or to make, alter or destroy the whole or any part of valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.”
As the section speaks for itself, it has a maximum punishment of 7 years which makes it a serious offence. The Hon’ble Supreme Court of India has laid down in the case of Prof. R.K. Vijayasarathy v. Sudha Seetharam, the ingredients to constitute an offence under Section 420 are as follows: i) a person must commit the offence of cheating under Section 415; and ii) the person cheated must be dishonestly induced to a) deliver the property to any person; or b) make, alter or destroy valuable security or anything signed or sealed and capable of being converted into a valuable security. Thus, cheating is an essential ingredient for an act to constitute an offence under Section 420 IPC. Cheating is defined under Section 415 of the IPC. The ingredients to constitute an offence of cheating are as follows: 4 i) there should be fraudulent or dishonest inducement of a person by deceiving him. The person who was induced should be intentionally induced to deliver any property to any person or to consent that any person shall retain any property, or the person who was induced should be intentionally induced to do or to omit to do anything which he would not do or omit if he were not so deceived. Thus, a fraudulent or dishonest inducement is an essential ingredient of the offence under Section 415 IPC. A person who dishonestly induced any person to deliver any property is liable for the offence of cheating.”
According to Murray (1958), the word “fraud” comes from the Latin word “fraus” which means deceit. In the Indian context, Fraud is a criminal act punishable u/S420 of the Indian Penal Code, 1860.
The Hon’ble Supreme Court of India has laid down in the case ofProf. R.K. Vijayasarathy v. Sudha Seetharam, the ingredients to constitute an offence under Section 420 are as follows:
i) a person must commit the offence of cheating as defined in Section 415, IPC
ii) the person cheated must be dishonestly induced to
a) deliver the property to any person; or
b) make, alter or destroy valuable security or anything signed or sealed and capable of being converted into a valuable security.
Thus, cheating is an essential ingredient for an act to constitute an offence under Section 420 IPC. Cheating is said to be committed when one person fraudulently or dishonestly induces another to either deliver any property or retain any property or when the induced person commits an act or omits commission of an act which he would not have done or omitted if he was not so induced. This definition is laid down underSection 415 of the IPC.
In a layman’s language, the criminal liability of a person is directly related to whether his actions are declared as a criminal act in I.P.C. or categorically so declared by a statute. Further, the basic ingredients of actus reus and mens rea must be present for any act to be declared as a criminal act.
Thus, one may observe that the law though existing on paper, there’s a dearth of infrastructure to bring every culprit to justice and this is exactly the loophole that is being capitalized upon by goons to exploit the lucrative construction industry.
Dimensions of Frauds in Construction Industry
The frauds committed in the Construction Industry are mostly initiated at the instance of Builders or Promoters. As most transactions happen in closed walls of the Builder’s or Promoter’s Office, it is not easy to detect the anomaly. The said frauds may be classified into three dimensions:
1. Flowing from Builder towards the Government by bribing the government officials for sanctioning permissions which are ought not to be granted.
2. Flowing from Builder towards the Consumer by not using quality and standardized raw materials, delaying possession of the property, misappropriating funds of consumer, allocation of one premise to multiple innocent investors and/or consumers.
3. Flowing from Builder towards the Contractor by filing false and frivolous litigations against the contractor, breaching conditions of construction contract leading to delay in construction, not procuring due permissions from concerned government authorities and thereby withholding payments due to contractor.
Types of Frauds
1. Violate the approved plans- The owners/contractors need to get plans of their buildings approved by the Municipal Corporation and this sanction is granted by considering various factors like safety, health etc. But it is observed that the Contractors often build additional floors or clubhouses that are illegal, thus the final outcome is the complete opposite of the plan approved.
2. Defective Construction- The most rampant form of fraud in the Indian construction industry is defective construction. Defective construction refers to the deficiencies or flaws in the construction process, it can be due to inferior raw materials, defective plan, or design that leads to the failure of the end product which ultimately causes injury to the property. The Construction defects can be broadly divided into two categories-
a) Patent defects that can be found with ordinary diligence or are ostensibly visible within initial years
b) or can be latent that could not be discovered for many years
3. Mismatch of Undivided Share of Land (UDS)- UDS refers to the ratio of one apartment to the total built-up areas of all the apartments. As in the case of Apartments, many floors are built over the same piece of land, so the cost of land is shared by all the owners proportionately and they become owners of these lands but this land cannot be divided so their share is termed asUndivided share of land (UDS). So, in simple words total area of the land divided by the number of apartments is equal to UDS but in reality, the owners are not given their true share of the UDS. The builders dishonestly reserve the surplus UDS for some unauthorized or additional construction in near future. This mismatch of UDS affects consumers egregiously as they are not able to recover their true share when there are re-development projects or acquisitions by the government.
4. Artificial hike in the prices- The builders tend to commit fraud by manipulating payment invoices and creating artificial hikes in the prices. It is usually done through the following methods-
a) Contractors can exaggerate the payment made for labour or material that shows higher expenditure than incurred, thus saving the bucks for them
b) Or they could present completely fake payment invoices for the work or material that was never in the picture.
c) Or charge for the wages of the trained personnel but in actuality, the work was done by an apprentice.
5.Bid Rigging– Bid rigging is also called collusive tendering. It refers to the situation when people try to manipulate the bidding process to prove it to be advantageous for them. For example- when some people try to hike the price of sale dishonestly, or some try to increase the tender price for the contract.
6.Money laundering– Money laundering is the process through which the money from illicit resources is projected as gains from lawful resources to make it look clean. The construction industry is the hub of such transactions because large sums of money are involved in the construction projects and it is very easy to hike the price. For eg- one can show that there was a sale proceed for Rs 10 crore but in reality, it amounted to only Rs. 2 crores, thus through this practice the person turned black money of Rs. 8 crores into white money.
Major Construction Frauds in India
●Adarsh Housing Scam– This scam revolves around a building named Adarsh Housing Society situated in Colaba, Mumbai which was allotted to 1999 Kargil war heroes war widows. The probe was issued in 2010 considering it to be the misuse of the land but the revelations were murkier than expected which are as follows-
a) 6 floors were sanctioned in the original plan but the building had 31 floors, even after constant objections from the Navy because this 31 floors building would be a serious threat to the helipad and military installations that were under construction.
b) The flats were not allotted to the war heroes instead were acquired by politicians and other influential people.
c) The flats were acquired through Benami transactions and that too at significantly low prices.
d) During the probe, it was found that the building even does not have environmental clearance.
The matter was brewing since 2003 but the probe began in 2010 when the list containing names of some owners was released by the media. TheRTI showed that 40% of sales were made to civilians which were approved by Mr. Ashok Chavan and even his mother-in-law owned a flat in the building. Many bureaucrats were part of this scam and as the probe was subsisting many files went missing. Till now, nine people have been arrested and the order has been passed to demolish the building.
●Karnataka Waqf Board Land Scam– The 7000-page long report by the Karnataka Minorities Commission reveals that property worth Rs. 2 lakh crores have been misused by the Waqf Board of Karnataka. The property reserved for charitable purposes was illegally transferred to private institutions and individuals at throw-away prices, thus playing fraud on the people who were entitled to hold the property.
●Beigh Construction Company case– it has been alleged that the Beigh Construction Company used fraudulent tactics to procure the contract from ICRON for the construction of the tunnel. The company forged balance sheets (Joint venture) JV AIMBPL-BCC of the year 2013-14, 2014-15 and balance sheet of BCC for the year 2015-16. These forged balance sheets were submitted to get the tender and they were successful in doing so. The company even played fraud of 9 crores on the complainant (Lalit Agarwal, Managing Director – Amritanshu Infrastructure and Management Pvt. Ltd.) as Beigh Construction Company did not pay the amount, they were liable for and even wrongfully withhold the machinery, equipment, plants, stores of JV (joint venture) worth crores in which the complainant was 51% shareholder, therefore, causing wrongful gain to himself and corresponding loss to the complainant.
The Role of RERA, 2016
Before formulation of the Real Estate (Regulation and Development) Act, 2016 (RERA, 2016), the buyers were concerned about the quality of the infrastructure built, whether title deeds will be undisputed or not or whether the delivery of their constructed sites will be provided to them within adequate time or not or what will happen if the builders fleet away. Thus, the significant reason behind implementation of the RERA in 2016 was to put a check on the stakeholders of the industry who were reaping benefits at the sufferance of the consumers. The major takeaways from the Act that help to curb such fraudulent practices are:-
- The act lays down a systematic framework for the developers that guides them right from the planning stage to the execution stage of the project.
- It is mandatory for the developer to get the project registered under RERA except for the projects in which the land area is less than 500 square metres. The unregistered projects are not eligible for sale, advertisement or to seek investment. This will help to keep an eye on all the major projects under construction and to cover it within the jurisdiction of Real Estate State Regulatory.
- A minimum of 70% of the amount deposited by the buyer’s or investors has to be kept in a separate account. This sum can only be withdrawn only for the construction and land-related costs after the certification by an engineer, a chartered accountant, and an architect. The provisions also bar developers to seek advance payment of more than 10% of the cost of the property before the sale agreement has been signed, thus, protecting the funds of the buyers from being embezzled or to be employed in unscrupulous activities.
- The builder has to sell the apartment as per carpet area and not according to the super-built area. Even the uniform formulae have been laid down to calculate carpet area. Now, the term carpet area only includes the enclosed area that can be actually used by the buyer The common area, balcony area is not to be added. This will ensure that buyers do not fall for such false claims as it will help in ascertaining the cost per square feet effectively.
- The structural defects or issues concerning quality needs to be rectified free of cost within 30 days from the date of such complaint by the seller. This provision applies for the period of five years since possession.
- The buyer is entitled to seek any information regarding the project like plan layout, materials used, timeline etc.
- The Real Estate State Regulatory has been set up to monitor as well as redress all the grievances of the buyer concerning real estate matters.
- If the delivered site does not meet the terms of the agreement, the buyer is entitled to get full refund of the amount and in some cases interest on such amount is also payable by the seller. Moreover, if the buyer discovers that the title provided is disputed or false, then he could also claim compensation with the refund.
- The seller who violates the conditions laid down under the Act is liable to pay upto 5% of the evaluated cost of the property as the penalty.
- If it is found that the seller committed fraud to procure registration then registration number of such agent is cancelled as per Section 9(7) of RERA, 2016.
Thus, the RERA, 2016 has helped in infusing transparency and accountability in the construction industry by regularising the industry.
Other Ways to Combat Construction Frauds
● Role of government– The government can play a proactive role to curb such practices. No doubt, after the implementation of the RERA, 2016, the number of frauds has decreased but still, there are various instances where frauds are discovered. Thus, the government should employ stringent measures to stop such practices and constant inspection within the authorities and at ground level should be conducted to nip the evil at the embryonic stage only. The awareness campaigns can also be started to create awareness about prevalent frauds in the industry and how to prevent them.
● Vigilant consumers– The consumers should be vigilant and aware enough while employing the builders. A proper background check regarding the credibility and competency of the builder should be conducted before hiring him. This will reduce the chances of fraud. The consumer needs to be apprised about the laws that can help him avail the remedy in such cases.
●Monitoring of the tasks– The tasks of the builder should be constantly monitored which leaves no possibility for them to engage in fraudulent practices like substitution of the material or falsifying payment invoices.
● Written documents– All the agreements should be reduced into written contracts so that the terms can’t be denied later and could be used as evidence if needed.
● Databases of builders and contractors– The government after providing licenses to the builders can publicly release the names of such license holders so that people do not fall into the trap of people impersonating as reputed contractors.
● Professional legal advice– Parties before entering into an agreement should seek legal advice so that any discrepancies or foul plays could be located beforehand.
● Encourage whistle-blowers– Whistle-blowers can help confront and unearth such frauds in the society. Sometimes people are scared of the consequences of raising voices against the goons or politicians and as a result, stay silent in the cases of such fraud. Thus, the people should be encouraged to play the role of whistle-blowers in society and the policies should be made to incentivize and provide security to the Whistle-blowers.
The Construction industry is the backbone of economic growth in many developing countries, but as every coin has two sides, this industry also has some demerits. Prevalence of corruption and its progeny fraud in the construction industry act as the impediment in the development of any economy. These acts divert the money intended for the poor into the pockets of corrupt officials and also bring in other serious repercussions. Thus, these activities need to be plunged and for this, all the key stakeholders- government, project owners, contractors, suppliers, engineers and consumers need to co-operate and act as a team to eradicate fraudulent practices from the industry. The efforts should be made towards the digitalization of the industry. In case any fraud is discovered, the investigation should be concluded speedily so that the evidences are not tampered with and the parties committing such offences are punished as per law. The proactive role has to be played by the judiciary, police and other investigation agencies to adjudicate the truth.
Thus, it can be concluded that the stringent implementation of laws, transparency in the transactions, vigilance at the ground level and relentless action against the culpable is the need of the hour to end this menace and transform the real estate sector and to build a level playing field that is based on honesty and transparency so that this sector could be developed to its full potential and our economy can reap the benefits.
About the Authors
Mr. Ajay Khade is an Advocate at the Bombay High Court.
Pranjali Aggarwal is a 4th Year Law Student at University Institute of Legal Studies (UILS), Punjab University (PU), Chandigarh, and an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Aakaansha Arya
Senior Editor: Muskaan Singh
Associate Editor: Pranjali Aggarwal
Junior Editor: Tisa Padhy
Preferred Method of Citation
Ajay Khade and Pranjali Aggarwal, “Construction Frauds: A Critical Analysis of Indian Scenario” (IJPIEL, 18 February 2022)