The Chennai Corporation council recently passed a resolution to widen roads by acquiring private property. Nothing new about this except that it decided to compensate the land acquired by issuing Development Rights Certificates (DRC) instead of cash (read report here)

Chennai is a late starter in deploying DRCs when compared to Mumbai and Hyderabad. But that is not the reason for disappointment. The concern is that it joins other Indian cities to misrepresent DRC or popularly known as TDR (Transferable Development Rights), as a just form of compensation.

Cities offer TDRs to gullible property owners as a stable financial entity that an owner can hold on to if they wish and reap the accrued value. Like a share certificate, they can trade smoothly and for profit, is the propaganda line.

On the contrary, experiences across the country show that all these assumptions are incorrect. Indian cities have conveniently taken the idea of TDR from the American planning system without the accompanying guarantees. In the American System, TDR is a compensation for denying development rights over a property, leaving other rights intact. On several occasions, the US Supreme Court has made it clear and that “TDRs should not be used to substitute for just compensation in a real takings situation [forced acquisition].” (more about TDRs in the US here)

TDRs are in Indian conditions are used to bypass the legal obligations imposed by land acquisition and avoid uncomfortable questions about fair compensation. Cities weave a myth and create an illusion that virtual building rights, which TDRs confer, is frictionless, valuable and easily to profit from.

What is TDR?

Land comes with a bundle of rights. One of them is right to build. When the state imposes restriction over developing the land as in the case of a heritage building, the owner loses the right to build or build more. In such an event, the owner is allowed to transfer the building rights denied to another property of his/her choice or sell it to a willing buyer.

For example, say you own a 500 square metre building located on a 1000 square metre land. When government refuses permission to extend the building because it is a heritage structure, the extent of building right denied would be as follows: (Plot area X Permissible FSI) - existing built up area. In this example it would be (1000 x 1.5) – 500, which would be 1000 square metre. FSI or Floor space index is a ratio, which determines how much one can build in a given plot. In Chennai it is about 1.5 average.

The denied building right - 100 square metre - would be the TDR or DRC. In order to make the TDRs attractive, the city government usually doubles the offer. Instead of 1000 square metre the TDRs would be given for 1500 or 2000 sq. meter, which can then be used in another property to build over and above what is permitted or sold to a builder who would wants to use it in his projects.

In the Indian avatar, the TDR is compensation for the land acquired and prevents cash outflow for the government. On the face of it, TDR appears as a win-win proposal, but in principle and practice, it is not.

Value of TDR

The value of TDR would always fall short of the compensation given through land acquisition process. For example, in Goregaon, Mumbai, land costs Rs 53,000 per square meter and the TDR is priced at Rs 21,000 to 25,000 per square metre. If 500 square metre of land is acquired, the compensation including the solatium under the land acquisition Act would be about Rs. 4.24crore. (500 X land value X 1.6 solatium). Instead, if TDR is given in exchange, the value would be abut Rs 2.4 crore (500 x1.3 x 1.5 sq. metre x Rs 25,000). (More on Mumbai TDR )

Second, the value of TDR is never stable. Apart from the swings created by speculation, government policies themselves often undermine the value. In Mumbai when FSI in the suburbs were raised from 1 to 1.33, the value of TDRs dropped since the demand reduced (read report here). The rise in FSI allowed property owners build more without having to buy TDRs.

A similar situation was created when the premium FSI scheme was introduced. Premium FSI allows property owners to build more than what is permitted for a fee. It was not surprising to see the TDR lobby strongly criticising the government for this and even legally challenging the schemes that undermine the value (more details here).

Third point is that the government does not enhance the TDRs when the property is rendered unusable after partial take over. For instance, if 10 metre of a 20 metre deep plot is acquired for road widening, the plot becomes unusable for all practical purposes because of the shortened depth. In such cases, the state is not obliged to increase the TDR.

If you have a choice between TDR and cash, go for cash.