FINANCIAL BEARING ON THE PROMOTER – SEPARATE BANK ACCOUNT – RERA
The Real Estate (Regulation and Development) Act, 2016 (the Act) came into absolute implementation on 1st May 2017. This act provides for the promotion and development of the real estate sector which is pertinent as it plays a vital role in fulfilling the needs and demand for housing and infrastructure and acts as an important pillar of the economy, society, and environment. Before the implementation of the Act, this sector was highly unregulated with the absence of professionalism, standardization and lack of adequate consumer protection, its health, orderly growth, and development was highly hampered. The implementation of the Act was to fill the previously existing shortcomings. The Act brought about many changes, one such major change was to ensure transparency by the registration of the ongoing projects. Another change in this respect was the radical change from having escrow account to a separate account, as required by Section 4(2)(l)(D) of the Real Estate (Regulation and Development) Act, 2016 (hereinafter referred to as “the Act”) with has a direct link to the transparency of the sector and the financial bearing on the promoter. According to Section 4(2)(l)(D)of the Act, the promoter is required to submit a declaration along with an affidavit stating that seventy percent. of the amounts realized for the real estate project from the allottees, from time to time, shall be deposited in a separate account to be maintained in a scheduled bank to cover the cost of construction and the land cost and shall be used only for that purpose. The amount withdrawal to cover the cost of the project can be in proportion to the percentage of completion of the project but only after the same has been certified by an engineer, an architect, and a chartered accountant in practice. In order to keep a check on the financial statements of the promoter, the proviso to Section 4(2)(l)(D) requires the auditing by a chartered accountant in practice to be carried within 6 months of every financial year. Such a statement should be signed and verified during the audit that the amounts collected for a particular project have been utilized for the project and the withdrawal has been in compliance with the proportion to the percentage of completion of the project. It is pertinent to note that the abovementioned “schedule bank” means a bank included in the Second Scheduled to the Reserve Bank of India Act, 1934. These banks comprise Scheduled Commercial Banks and Scheduled Co-operative Banks
Scheduled Commercial Banks in India are categorized into five different groups according to their ownership and/or nature of the operation. These bank groups are – State Bank of India and its Associates, Nationalised Banks, Regional Rural Banks, Foreign Banks, and Other Indian Scheduled Commercial Banks (in the private sector).
Scheduled Co-operative Banks consist of Scheduled State Co-operative Banks and Scheduled Urban Co-operative Banks.
Some may argue that this shift from an escrow account to a separate account is against the promoter. However, that cannot be said to be so. The transparency of the sector is a much vital aspect to be considered and since the amounts from the separate accounts (promoter’s current account in a scheduled bank ) can only be realized on the authority’s permission, it creates a better regulatory. On the other hand, an Escrow Account is under the supervision of a third party meaning the bank and the account holder (the builder) enter into an agreement and appoints a trustee for the account, essentially a bank or a recognized lender. In real estate projects, the banks themselves would be the trustees. These trustees or escrow account manager acts as a signing authority who would release the funds as per the terms and conditions of the agreement. The main Objective and Intention of this provision was to ensure that there is no temporization of the project. As in the absence of trustees, the element of misuse of funds might arise. As the promoter might use the collected funds of one project into business expansion or construction of another project. So in order to ensure that money collected from the Allottees for the Specific project should be vested in that particular project and also to avoid any diversion/diversification of funds, this provision comes into existence.
DISCREPANCY IN WITHDRAWAL
Section 4(2)(l)(D) of the Act provides that the funds from the RERA Account must be used only to cover the construction cost and the cost of acquiring land for that project. This provision states that the funds from the RERA Account shall be withdrawn by the promoter after it is certified by an architect, an engineer and a chartered accountant in practice, that the withdrawal is in proportion to the percentage of completion of the project.(“Proportionality Clause“)’, However, this is a bit complicated as there are no set guidelines under the RERA as to the manner in which the percentage of the completion of the construction of the project is to be calculated. Hence, the proportionality clause is not the criteria to calculate the proportion. Since land is a pre-requisite element for any development activity, the promoter would have to deploy the funds for
1. Acquiring the land
2. Incur costs for commencement of construction of the project and
Funds in procuring land take a major portion of the estimated costs but the proportion of development of project completed merely by procuring land is minimal. Hence, a discrepancy arises with respect to this proportionality. This provision creates a liquidity crisis for the small and medium-sized promoters because of the lack of substantial amount of money to start the project in the beginning. They are also restricted by the Act from creating any mortgage, charge, or encumbrance over the land, thereby making the promoters drown in the liquidity crises. This discrepancy has been solved by some states. Maharashtra vide circular no. 7 of 2017 dated July 4, 2017, and MahaRERA circular for Union Territories of Dadra and Nagar Haveli and Daman and Diu circular no. 10/2017 dated Aug 4, 2017, and Gujrat RERA circular No. 2/2017 dated July 29, 2017, required a practicing Chartered Accountant to certify the withdrawal amounts while considering the actual costs in procuring land. The proportion of work when multiplied with the estimated cost gives the maximum amount of withdrawal. Because of such a calculated amount, it helps the liquidity crises of the promoters, especially the small and medium-sized promoters.
REAL ESTATE PROJECT (MAINTENANCE OF SEPARATE BANK ACCOUNT) DIRECTIONS 2020 :
The web-based system of RERA provides for maintaining the account details by the promoter. The authority has been receiving complaints from the allottee that in some cases the promoters have not declared the separate project account on the website and that in some cases the same bank account has been given in more than one project which is a violation of the provisions of the Act. It was further noted that the promoters are not following the procedure laid down for the withdrawal and utilization of the money from the separate bank account. It has also come to the notice of the Authority that the promoters, in contravention of the provisions of the Act, are allowing the lien to be placed on the Separate Bank Account of the project by the Bank. The objective of implementing provision for a separate bank account was to stop the diversion of funds, however, it is not being adhered to. States are taking proactive measures to counter the situation. For instance, the Uttar Pradesh RERA by virtue of Section 34(f) and (g) and Section 37of the Act issued the following regulations on 5/06/2020-
Opening of account-
Deposits in Account
Withdrawal from Account
Reporting to the Authority–
The annual report on the statement of accounts shall be in Form REG-5 as provided under regulation 4 of U.P. RERA Regulations. If the Form REG-5 issued by the statutory auditor reveals that any certificate issued by the project architect, engineer or the chartered accountant has false or incorrect information and the amounts collected for a particular project have not been utilized for the project and the withdrawal has not been commensurate with the proportion to the percentage of completion of the project, the Authority, in addition to taking penal actions as, contemplated in the Act and the Rules, shall also take up the matter with the concerned regulatory body of the said professionals i.e. architect, engineer or chartered accountant, for necessary penal action against them, including dismemberment.
Changing the Separate Bank Account of the project
The account cannot be changed under normal conditions. The authority may consider the change in the separate account of the project under the following circumstances:
It is pertinent to note that these conditions are not exhaustive and may be extended at the discretion of the authority. Furthermore, the documents required to be submitted are – form RA-1, RA-3, R A- 4, RA- 5, RA-6, Account Statement, and annual audit report.
Powers of the Authority on the separate Account of the Project
Closure of the separate account on completion of the Project
JUDICIAL AND QUASI JUDICIAL INTERPRETATIONS:
Neelkamal Realtors Suburban Private Limited and another v Union of India and others Bombay High Court, 6 December 2017, 2017 Indlaw MUM 1891 The honorable court observed that the reason behind framing this provision is to protect the consumers and allottees interest. The amount collected from allottees by the promoters often gets diverted as promoters siphon funds collected for one project onto another, this leads to delay in completion of the project. So to ensure that funds are properly utilized and there is timely completion of the project, this provision comes into existence. The deposit made by the promoter can be duly withdrawn upon certification and under the instructions of the authority. Such unethical practice is curbed under RERA Scheme, wherein one is bound to deposit a 70% amount collected from allottees for the proposed project in RERA Account. This legislation is enacted keeping in mind the interest of allottee and consumer in large therefore it is not an arbitrary provision. Also, the court stated that the provision of section 4(2)(l)(c) affirms that only 70% of the amount has to deposit in a separate account, which means that rest 30% shall remain with promoter/ developer which is a benefit given to the promoter, hence this provision balances the rights of both the parties.
Greenopolis Welfare Association vs. Orris Infrastructure Ltd. and Ors. (23.01.2019 – RERA Haryana) : MANU/RR/0540/2019 It has been stated by the complainant that details of the total money collected have not been disclosed by the developers and separate bank account in accordance with applicable statute has not been opened and operated by the developers. It has also been alleged that the receivables from the project have been misappropriated elsewhere by the developers. The authority held that it is committed to ensuring that the purchasers are not cheated/defrauded and the hard-earned money of the purchasers is not misappropriated. It was held that the rights of allottees in the project need to be protected by ensuring that project receivables to be received by the promoters from their customers, as well as amounts received from the sale of unsold inventory, are only used/utilized for construction/implementation/completion of the said project and for payment of statutory dues and for no other purpose.
An allegation of siphoning off funds can be fought by the bona fide conduct of the developer- in Narender Singh Mann and Ors. vs. Astrum Value Homes Pvt. Ltd. and Ors. (17.10.2018 – RERA Haryana) : MANU/RR/0096/2018
Keeping in view the larger interest of the allottees, the Authority has taken a view that since the funds collected from the allottees doe not appear to have been siphoned away by the respondents and they are willing to follow the directions of the Authority to complete the project, the refund of the money paid by the complainants in this situation is not justified. The Authority had asked the respondents to open an ‘Escrow Account’ in which they should contribute an amount of Rs. 20 crores from their own resources and invest that money only on completion of the project.
 http://legislative.gov.in/sites/default/files/A2016-16_0.pdf section 4(2)(l)(D)
This piece of research is purely based on the knowledge and expertise of the author. The author of this article, Harshit Batra is an Advocate and RERA Consultant, practicing Pan India. To bring about his expertise on Rera; He is the *Former Legal Executive of the Real Estate Regulatory Authority – Gurugram Bench. His practice concerns majorly: RERA, Arbitration, Consumer protection, NCLT, and Criminal laws. He is also the National Coordinator of the Youth Bar Association of India (Regd.) For further queries on the subject, he can be contacted at: [email protected]
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