THE TURBULENT TDR MARKET: A DECADE OF STAGNATION AND RECENT LEGAL DEVELOPMENTS

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By Prashanth Mirle, Advocate and Partner at India Law Practice?

This article is also available in PDF format and can be accessed at the following link: https://bit.ly/4ga13bE

Background of TDR in Karnataka:

The Government of Karnataka’s initiative to use Transferable Development Rights (TDR) as a tool for urban development has inadvertently led to a complex web of challenges. Introduced under the Karnataka Town and Country Planning Act, 1961, the scheme aimed to compensate landowners for surrendered land through additional Floor Area Ratio (FAR). However, the government’s policies, including dividing Bengaluru into Zone A, B, and C for TDR utilization and later shifting to guidance value-based valuation under Section 45B of the Karnataka Stamp Act, created unintended consequences.

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For instance, while the guidance value linkage was intended to standardize compensation, it failed to address the practical difficulties of implementing TDR effectively. The reliance on voluntary land relinquishment, coupled with procedural delays and market saturation risks, trapped the government in its own system. Unutilized TDR certificates, lack of transparency, and valuation disputes exemplify how the well-intentioned policy has become a cautionary tale of bureaucratic and administrative inefficiencies.

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As of today, a significant portion of TDR certificates remains unutilized, despite efforts to modernize and regulate the process. The cumulative value of these unused certificates underscores the need for policy reforms to unlock their potential for urban development.

Over time, to streamline and simplify the system, the government shifted the valuation of TDR certificates to align with the guidance value of properties as prescribed under Section 45B of the Karnataka Stamp Act, 1957. This change aimed to create a standardized and transparent framework, ensuring fair compensation and uniform applicability across the state. The guidance value linkage helped improve the predictability of TDR transactions, but it also introduced complexities, particularly in cases where certificates remained unutilized.

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To date, a significant number of TDR certificates have been issued, yet a considerable portion remains unutilized due to various market and policy challenges. These unutilized certificates represent untapped potential in urban development, with their cumulative value amounting to several crores, further underscoring the need for policy reforms and market incentives to encourage their effective use.

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Background and Key Developments:

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Over the last decade, the TDR mechanism in Bengaluru has faced significant disruptions. A critical factor contributing to this market paralysis has been the unresolved issue surrounding the acquisition of Bengaluru Palace Grounds for road widening. Despite its ambitious objectives, the TDR framework was marred by delays in issuing Development Rights Certificates (DRCs). The Supreme Court’s directive, issued in 2014, specifically addressed the issuance of TDR certificates to the successors of the Maharaja of Mysore for land acquired from the Bengaluru Palace Grounds for road widening. This mandate required compliance with Karnataka Town and Country Planning (Benefit of Development Rights) Rules, 2016. However, bureaucratic inefficiencies and legal disputes stymied progress.

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Recent government initiatives have sought to revitalize the broader TDR system, although challenges specific to the Palace Grounds acquisition remain prominent. Key among them is the recognition of agricultural land, which, upon notification, can be converted for residential purposes with the imposition of betterment charges. This measure, coupled with efforts to streamline road widening projects, aims to address valuation disputes and enhance urban infrastructure. Nonetheless, the prolonged stalemate over the valuation and issuance of TDR certificates for the Palace Grounds underscores challenges unique to this high-profile case, alongside systemic issues affecting the broader TDR framework.

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An Illustration of the Palace Grounds TDR Issue:

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Imagine a scenario where a city’s urban expansion plan requires widening a crucial road. This road runs adjacent to a historically significant estate, the Palace Grounds, owned by the successors of a royal family. To proceed, the government decides to acquire a portion of the Palace Grounds. Instead of monetary compensation, the government offers Transferable Development Rights (TDR) certificates to the landowners, allowing them to use or sell equivalent development rights elsewhere in the city.

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Initially, the government categorized areas for TDR utilization into Zones A, B, and C, determining where development rights could be exercised based on factors like infrastructure capacity and urban density. However, over time, this zoning system was eliminated to simplify processes and expand applicability. The removal of zoning categories aimed to make TDR certificates more flexible and appealing for stakeholders.

Despite the Supreme Court’s directive mandating the issuance of TDR certificates under Karnataka Town and Country Planning (Benefit of Development Rights) Rules, 2016, various challenges stalled progress. These include bureaucratic delays, disputes over land valuation, and the complexity of linking certificates to the original land.

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Fast forward to today, the prolonged delay has inflated the estimated value of these certificates to approximately 2,792 crores. A sudden release of these high-value TDR certificates into the market risks flooding it, potentially devaluing existing certificates and destabilizing the fragile TDR ecosystem. Developers and investors may face challenges, while the broader market could experience a decline in trust and participation.

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Challenges of TDR in the Current Market:

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The TDR market faces significant hurdles as existing certificates are trading at a premium of 140-150% over their base value. However, the impending release of high-value certificates linked to the Palace Grounds acquisition threatens to destabilize the market. If these certificates, valued at two times the current rates, are introduced in bulk, the demand will sharply decline. This risks eroding the investments of stakeholders who previously purchased TDR certificates at inflated rates. The speculative nature of TDR trading further compounds this challenge, creating an uncertain environment for developers and facilitators alike.

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The Supreme Court recently highlighted the historical significance of the Palace Grounds, noting that it served as the private residence of the Maharaja of Mysore for many years and is located in the heart of Bengaluru. The court emphasized that TDR certificates must be issued in accordance with TDR rules and that the valuation of the land must align with the guidance values prescribed under Section 45B of the Karnataka Stamp Act.

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The court criticized the government’s arbitrary reduction of the valuation to 40% of the guidance value by treating the land as agricultural without basis. Notifications under Section 45B prescribed specific guidance values of Rs. 2,83,500 per sq. meter for Bellary Road and Rs. 2,04,000 per sq. meter for Jayamahal Road, which were deemed applicable for issuing TDR certificates. The court has provided a six-week timeframe for compliance.

Further, the court noted that the issuance of TDR certificates for 15 acres and 39 guntas would result in an additional 13,91,742 sq. feet of constructible area, approximately valued at Rs. 1,396 crores after deductions. This valuation underscores the high stakes and the potential market disruption if such certificates are suddenly released. The government’s failure to comply fully with previous orders has not only created delays but also affected the credibility of the TDR process in this case. The controversy surrounding the Palace Grounds exemplifies the challenges in TDR implementation. Initially valued at approximately 300 crores, the worth of TDR certificates for this land has ballooned to 1,800 crores and, as per recent reports, to two times the value of 1,396 crores. Such fluctuations highlight the systemic inefficiencies and speculative dynamics plaguing the TDR market.

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The Supreme Court’s recent judgment reaffirms the mandate to issue TDR certificates at valuations consistent with Karnataka Stamp Act guidance values. However, introducing such high-value certificates into an already fragile market risks destabilizing the ecosystem further. Existing certificate holders may face steep discounts, while prospective participants and facilitators could encounter reduced demand and transaction viability.

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Recommendations and Advisory:

1. The BDA has already issued a certificate with a lower value. If a new certificate reflecting higher market value is issued, guidelines must be introduced to manage its sale in parts to multiple purchasers. This administrative clarity will help avoid disputes and oversaturation in the market.
2. Clear and phased guidelines are needed for issuing new DRCs to other landowners. This ensures the market remains balanced and avoids abrupt devaluation of existing DRCs.
3. Given the ongoing litigation in the Supreme Court regarding the title ownership of the Palace Grounds, the valuation of the TDR should proceed cautiously. Issuing TDR certificates without a clear resolution may complicate the legal standing of the title and lead to further challenges.
4. Potential investors must be informed of the legal ambiguities and pending adjudications surrounding the Palace Grounds TDR. Transparency is crucial to mitigate risks and ensure informed decision-making.
5. The government should engage current DRC holders, prospective buyers, and developers to discuss the implications of introducing high-value certificates and devise market-stabilizing strategies. This approach will ensure equitable treatment of all stakeholders. The TDR market in Karnataka, particularly in Bengaluru, stands at a pivotal juncture. While recent policy changes and Supreme Court directives provide a framework for progress, their success depends on effective implementation and collaborative governance. Resolving the Palace Grounds TDR dispute and addressing systemic inefficiencies are essential to unlocking the transformative potential of this urban planning tool. From the senior advocate’s perspective, proactive measures, transparency, and market stability are key to revitalizing Bengaluru’s urban development landscape.

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Conclusion:

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The TDR market in Karnataka, particularly in Bengaluru, is at a critical juncture. The potential introduction of a high-value TDR certificate from the Palace Grounds presents both opportunities and challenges. While this certificate could redefine market dynamics, its impact on existing TDR holders, prospective sellers, and investors must be carefully managed.

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The ongoing Supreme Court litigation over title ownership adds a layer of complexity, emphasizing the need for cautious valuation and issuance. Collaborative efforts between stakeholders and regulatory bodies are essential to ensure market stability, transparency, and equitable treatment for all participants. Addressing these systemic and legal challenges will be pivotal in unlocking the true potential of TDR as a sustainable urban planning tool.

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For details on the Supreme Court judgment regarding the Palace Grounds TDR case, refer to: https://drive.google.com/file/d/1dmISWYb5pgU1iLu8YAd333z9JmZAQTma/view?usp=sharing.