Introduction:
The enactment of the Real Estate Regulation Act 2016 aimed to instill transparency in the entire process, encompassing promotion, construction, sale, and the final handover of possession to the buyer. A key aspect monitored under RERA is the meticulous handling of funds. Authorities oversee the collection and utilization of funds, ensuring that the money collected from allottees is strictly utilised for its intended purpose, as verified through declarations and certifications from experts.
In the lending process, borrowers are expected to contribute their own funds, typically ranging from 10% to 30% of the total project cost, with the remaining balance being funded by lenders. Most real estate developers secure funds from financial institutions for their operations. Before disbursement, these financial institutions conduct thorough verifications on the project’s progress, disbursing funds only when satisfied. This practice enables developers to promptly complete projects without facing liquidity issues.
However, challenges arise in cases where developers collect funds from allottees as per the work in progress of project or the entire amount and borrows funds the financial institutions as well. In such instances, there’s a potential risk that borrowed funds might be diverted for the development of the specified project or even for other projects. This article seeks to provide clarity on how allottee funds and borrowed funds are utilized in the overall project development cost.
Provisions:
Section 4(2)(l)(D) of the Real Estate (Regulation and Development) Act, 2016 specifies that during the registration of a real estate project, developers are obligated to make a declaration through an affidavit. This declaration states that 70% of the funds collected for the project from allottees at various stages must be deposited in a distinct account held by a scheduled bank. Additionally, the promoter is granted the right to make withdrawals from this designated account, but this action is subject to certain conditions.
Withdrawals can only occur upon the submission of certificates from qualified professionals, including an Architect, Engineer, and Chartered Accountant. The withdrawal amount is strictly limited to the project’s cost in proportion to the degree of its completion. This provision ensures that developers adhere to financial transparency and use the allotted funds appropriately, linking withdrawals to the project’s progress and associated expenses.
Rules:
The rules of Karnataka Real Estate Regulatory Authority (RERA) provide clarification that the cost of construction encompasses all expenditures undertaken by the promoter. This includes both on-site and off-site expenses incurred in the development of the real estate project. Such costs cover payments made to any competent authority, whether at the State or Central level, and include taxes, fees, charges, premiums, interest, and other related expenses. Notably, the definition of construction cost also extends to encompass the interest on borrowed funds, emphasizing the comprehensive nature of expenses considered in the context of real estate development in Karnataka under RERA regulations.
Certificate:
In accordance with the provisions outlined under Section 4(2)(l)(D) of the Real Estate (Regulation and Development) Act, the Chartered Accountant plays a crucial role in the compliance process. The Chartered Accountant is obligated to issue a certificate in Form 4, affirming that the promoter has adhered to the specified provisions.
This certificate serves to validate the details of borrowings and mortgages related to the real estate project. The Chartered Accountant is entrusted with the responsibility of certifying the accuracy and correctness of the information provided in the certificate. This step ensures transparency and accountability in financial matters, reinforcing the regulatory framework set forth by the Real Estate Act.
Directions:
As per the Karnataka Real Estate Regulatory Authority (RERA) Bank Account Directions, 2020, the bank account created in compliance with the provisions of the Real Estate (Regulation and Development) Act and its corresponding rules is designated as a “No lien” account. This implies that no financial institution or entity can claim a lien on the funds held in this account.
Furthermore, the directions specify that a Fixed Deposit can be established using the funds available in this account. However, it is important to note that no loan or charge can be created against these fixed deposits. This condition ensures that the funds in the fixed deposit remain secure and cannot be encumbered or utilized as collateral for any form of borrowing. These directions aim to safeguard the financial integrity and purpose-specific usage of the funds associated with real estate projects regulated under Karnataka RERA.
Interpretation:
It is apparent from the information provided that each project is required to have a distinct designated bank account, as per the Karnataka RERA Bank Account Directions, 2020. Regardless of whether allottees are associated with the promoter or landowner through a Joint Development Agreement (JDA), the funds collected from them are deposited into the same designated account.
The rules indicate that the promoter has the flexibility to utilize the amount received from allottees, deposited in the designated bank account, to cover the costs of borrowed funds. Notably, there are no specific conditions outlined in the act regarding the transfer of borrowed funds by financial institutions into this account.
Traditionally, financial institutions disbursed loans for a particular project into the regular account of the promoter. However, such disbursals were contingent upon the proportion of completion of the project, ensuring that funds were released in alignment with the progress of the construction. This practice aimed to regulate and align the usage of borrowed funds with the actual development of the project.
Issue:
In situations where a promoter seeks a mortgage on a property and loans are disbursed based on the work in progress, there is a potential for the promoter to collect funds from allottees, leading to an excess of funds beyond the project’s cost. This scenario creates a risk of double financing for the same project. To mitigate this, banks implement controls, including obtaining a declaration from the builder before disbursing funds, ensuring that units remain unsold.
Financial institutions also exercise vigilance by verifying transactions in the designated account. Since the RERA-specified account and the promoter’s loan account operate independently, there’s a possibility of funds being diverted by the promoter to other projects. Additionally, observations suggest that funds borrowed by mortgaging project land and units may not always be utilized for the intended project.
To address these issues and in the interest of promoters, projects, allottees, and lenders, the Karnataka Real Estate Regulatory Authority has issued directions. These directions, outlined in a circular dated July 19, 2023, aim to provide a resolution and enhance transparency and accountability in the utilization of funds in real estate projects.
Circular
1. The Promoter of the Project shall deposit the entire amount borrowed for the purpose of the project into the designated account of the project and the money so deposited shall be utilised and withdrawn only for the purpose of the development of the respective project.
2. In case the promoter borrows the money for the project and registered the project phase wise as per explanation to Sec.3(2) of the Act, the promoter shall bifurcate and apportion the amount towards various phases and report the same during the quarterly updates along with Bank Statement or Chartered Accountant Certificate by way of Annexure.
3. The lender / Bankers/ FII shall also ensure to disburse such loan only to the designated rera account of the project. Such designated rera account of the project are available in K RERA website for each rera registered project.
4. The CA based on the books of accounts maintained while issuing the certificate shall also report whether the amount borrowed for the purpose of the project has been deposited into the designated rera account or not.
Conclusion:
The circular issued by the Karnataka Real Estate Regulatory Authority introduces more stringent and transparent norms by stipulating that mortgaged funds be deposited into the designated bank account. This measure ensures increased control and monitoring of fund withdrawals from these accounts by the bank. The impact of this circular is particularly notable in cases where loans are disbursed without considering the agreement to sell entered into by the promoter.
In practical terms, this circular addresses situations where, despite the completion of construction in multi-storied apartments, many units remain unsold. Some promoters secure financing from a bank different from the designated RERA operative account. The circular mandates that all funds, whether borrowed or from buyer installments, be deposited into a single RERA designated account. This not only provides greater comfort to certifying professionals but also streamlines financial operations for both the realtor’s bank and the lender’s bank. The coordination between the lender’s bank and the RERA operative bank ensures a synchronized and transparent financial process.
Author Bio
