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India set up a depository system in the 1990s to deal with the problem of physical share certificates, reduce settlement time and increase the efficiency of the securities markets. Instead of establishing an electronic depository, imagine if the Government had appointed an authority for deciding whether the seller has title to a security every time a transfer takes place, for a fee. This would have led to numerous problems. It would have increased transaction costs and settlement time for securities transactions. The sanctity of title to securities would have depended on the adjudication capacity of the State. The cost of maintaining adjudication machinery would have been borne by the parties, or worse, by the State.
The Government sought to resolve this problem by providing for infrastructure in the form of depositories, which are a near-foolproof method of obtaining title to shares. In an earlier article at Dr. Ajay Shah's Blog, we explored what the Indian land market could learn from the securities market. The problem of incomplete land records in India is similar to the problem of physical share certificates, only compounded by the complexity of multiple offices across which land records are kept.
The Rajasthan Assembly recently passed the Rajasthan Urban Land (Certification of Titles) Act, 2016 (Rajasthan Titling Act), which purports to be a shift from the presumptive titling system to the conclusive titling system for recording land titles. Popular discourse has praised this law as a big step toward a rules-based regime for land titling (see here and here).
In this article, we explain (a) why India needs to be more circumspect about adopting conclusive titling as its solution to the problem of incomplete land records; and (b) why the Rajasthan Titling Law, in its current form, is not a shift to conclusive titling.
Conclusive titling v. Presumptive titling
Globally, there are two systems of recording land titles:
Conclusive titling (Title registration system)
The State registers and guarantees the title to land. If a person claims and proves that she had a better interest in the land than the title-holder registered with the State, such person is insured by the State. The titleholder registered with the State cannot be dispossessed. Variations of this system are followed in Australia, Canada and the United Kingdom.
Presumptive titling (Deed registration system)
The State registers the deed under which a person obtains title to land. The State does not make any enquiry as to the legitimacy of the claim made under the document. If there is a dispute, the deed registered with the State is only presumptive evidence. It can be defeated by someone proving better title. The United States (with the exception of few a counties spread across five States), India and France follow this system of recording land titles. The State does not insure title, a private industry does that job.
The attraction of conclusive titling
At first glance, conclusive titling is appealing as it (a) protects property rights better than presumptive titling; and (b) makes title searches unnecessary as one only need rely on the State-issued title certificate. However, cross-country studies of land recording systems have revealed the following (McCormack, 1992 and Zasloff, 2011):
1. In countries following conclusive titling, the title registered with the State is conclusive subject to several caveats. For instance, the State's records do not take notice of (a) government interests such as claims on account of tax dues; (b) possessory interests such as short term leases and easements and long term interests such as those acquired by adverse possession; (c) discrepancies due to fraud; and (d) local municipal claims such as setback areas for road-widening, etc.Hence, a prudent purchaser of land will, in any event, conduct a search exercise to ensure that she will be able to enjoy the land uninterruptedly.
2. A private title insurance industry co-exists in countries where the State insures title. While the State only insures against defects arising due to the conduct of the State registry, private insurers typically also insure against claims not on the State's records, litigation costs, etc. This indicates that in countries where private title insurance is customary, State-insurance of title does not eliminate transaction costs associated with private title insurance.
Additionally, implementation of the conclusive titling system in India suffers from the following problems:
1. It requires the existence of a fully functional adjudication system at the level of each Tehsil (sub-district), to ensure that landholders have access to get their title registered by the State.
2. Depending on the location, a land parcel in India may have gone through innumerable transactions and the adjudicator will require to verify the legality of each of those transactions.
3. Adjudication is expensive, implying that people having better resources to get their title adjudicated by the State, will end up having better "title" to land.
Hybrid model proposed by the Rajasthan Land Titling Bill
The substance of the Rajasthan Land Titling Bill is this:
1. The State Government will appoint an IAS officer who will adjudicate title to urban land.
2. A person who holds title to a parcel of urban land may apply to the IAS officer for a title certificate confirming her title to the parcel. The applicant must pay a certification charge, which is a percentage of the circle rate prevailing in that area.
3. The IAS officer must not issue the title certificate if (a) there are unpaid tax dues; or (b) where the title is disputed, whether before a Court or otherwise.
4. Where a person enters into an agreement with the owner of the land on the basis of the title certificate and later finds that there was a defect in the title of the certificate-holder, the State Government will compensate such person for any loss that she may suffer due to any title defect (except one that is recorded in the certificate).
5. The law proposes to set up land-tribunals for entertaining appeals against orders of the certification authority.
Half-baked attempt at conclusive land titling
The Rajasthan Titling Law, though well-intended, will not resolve the problem of information asymmetry or transaction costs that burden land transactions today.
1. It is silent on whether the certificate will reflect encumbrances or interests such as grant of development rights or power of attorneys to sell, which are some common methods of alienating control over land in India today.
2. A large part of the land-related diligence in India pertains to the nature of the land (as opposed to the right of the seller), due to the multiple restrictions on marketability of different kinds of land. For example, if the land is agricultural, it cannot be sold to a non-agriculturist, or if the land is held in excess of the ceiling limits, it is susceptible to forfeiture by the State. The certificate issued under the Rajasthan Titling Law will not record the nature of the land. It will similarly not record the State's claims such as reservations under municipal laws for road-widening, etc. This means that purchasers of land will require to conduct their own diligence, despite the certificate.
3. The law allows the adjudicating officer to cancel the certificate if it is found to have been issued under mistake. This means that the certificate is not indefeasible and the purchaser will require to conduct an independent enquiry of the seller's title. Effectively, the title certificate will be no better than a Record of Rights (ROR) which has some presumptive value. It is also not clear what happens to third party rights created by the holder of a title certificate issued under mistake.
4. The law does not state that the title recorded by the State is conclusive and the person registered as the owner cannot be dispossessed. It merely insures persons who enter into any transaction on the basis of the title certificate issued by the State. Thus, the law does not pre-empt title-related litigation between the registered title-holder and a person claiming better title.
5. Finally, the law does not clarify the process for claiming insurance from the State for faulty certificates. Claiming such insurance from the State will, in itself, involve transaction costs.
The Rajasthan Titling Bill raises several other concerns relating to State-capacity:
1. Initial registration of title with the State is like adjudication of the applicant's title, as the registration process has involves determining the rights of parties to a land parcel. The registration will require the IAS officer to apply laws ranging from property law, contract law to hindu law. For example, where an applicant has obtained her title under a partition arrangement, the officer will require to dive into the legality and enforceability of the partition agreement, to adjudicate title. This will entirely depend on State capacity. A mistake in this process is a potential dent in the State's insurance fund.
2. Dependence on the State for proving one's title creates tremendous scope for rent seeking and corruption which is already widely prevalent in the area of maintenance of land records.
3. There is no publicly available information on whether the State of Rajasthan has considered the fiscal impact of setting up:
- The adjudication machinery; and
- The insurance fund for compensating those who suffer a loss by relying on the State-issued title certificates. (See McCormack 1992, noting that the entire assurance fund set up by the State of California was wiped out by one claim, which prompted the repeal of the California Torrens Act, the law which provided for conclusive titling in California).
4. Finally, there is no clarity on the process for deciding on insurance claims from the State for faulty title certificates.
What is the right intervention?
Incomplete land records is an outcome of inefficient record keeping systems. Once we see it this way, the solution requires infrastructure and institutional fixes more than a legislative solution. Some immediate steps which form part of the solution are listed below:
1. Consolidation of land records maintained across several offices: For example, consolidating the offices of the Sub-Registrar (where land transaction documents are registered) and revenue authorities (where the State records title for the purpose of collecting land revenue).
2. Connecting platforms which deal with land-related claims with the offices primarily in charge of land record maintenance. For example:
- Connecting the court registry and tax offices to the land record offices, so that notice of any litigation and orders (such as attachment on account of tax dues) affecting interests in land, are updated real-time in land records;
- Connecting the municipal offices to the land records offices so that notice of any local reservations and set-back areas, etc. is updated in the land record offices;
- Connecting the survey and settlement offices to the land records offices; and
3. Digitalisation of (i) land records; (ii) the process of recording interests in land; and (iii) the process of accessing land records.
Several States have initiated some of these steps and are at different stages of their implementation. Project Bhoomi undertaken by Karnataka and e-dhara undertaken by Gujarat are examples. The Digital Land Records Modernisation Program of the Central Government, which has been underway for sometime, is also meant to incentivise States to digitalise land records and consolidate the land record offices. Fixing infrastructure is a much more difficult solution than enacting a law to fix the problem. It requires tremendous political will, sustained efforts through political cycles and strong ground level teams. However, the implementation of the Aadhar project has shown that dedicated implementation-level teams can achieve what a law, by itself, cannot.
About the Author:
Bhargavi Zaveri (O-9136-2015) is a researcher at the National Institute for Public Finance and Policy. She thanks Shefali Malhotra and Anirudh Burman for useful discussions.
John L. McCormack, Land Title Assurance in the Computer Age, William Mitchell Law Review (1992).
Jonathan Zasloff, India's Land Title Crisis: The Unanswered Questions, Jindal Global Law Review, Vol. 3, 2011.
This article was originally published at Dr Ajay Shah's Blog on May 21, 2016. All rights reserved by the original publisher.
This article was originally published at Dr Ajay Shah's Blog on May 21, 2016. All rights reserved by the original publisher.