India - The 70% Conundrum Part II – Game Changing Directions of Haryana RERA.

Legal News & Analysis - Asia Pacific - India - Construction & Real Estate.

24 July, 2019

 

Taking a cue from the Supertech Home Buyers case (as discussed in Part I of this series), the Haryana Real Estate Regulatory Authority (HRERA) has now issued directions to promoters on opening bank accounts, titled as ‘The Haryana Real Estate Regulatory Authority, Gurugram Bank Accounts for the Registered Projects Directions, 2019’ (Directions).

 

The Directions discuss the opening and maintenance of bank accounts specified under the Real Estate (Regulation and Development) Act, 2016 (Act) and the Haryana Real Estate (Regulation and Development) Rules, 2017 (Rules).

 

The Directions have been issued pursuant to the powers conferred under Section 37 of the Act, which enable the HRERA to issue necessary directions from time to time to the promoters (developers) or allottees or real estate agents.

 

Requirement of Three Bank Accounts

 

Under the Directions, a promoter is required to open three bank accounts in relation to a real estate project. They are as follows:

 

3 Bank Accounts - Real Estate - HRERA

 

  1. Project’s Master Account (Master Account):

    The entire amount realised from the allottees will have to be deposited in a no-lien/ no-charge account, called the Master Account. The Directions further state that this bank account has to be free from all ‘encumbrances, lien, loan and control of any third party i.e., lender/ bank/ financial institution’. Prior permission of the HRERA is required for carrying out any change to this account. At the end of each business day, 70% of the amount lying in this Master Account must be transferred to the RERA Complaint Separate Account.

  2. RERA Complaint Separate Account (RERA Account):

    Out of the Master Account, 70% of the receivables will be deposited into a separate bank account called the RERA Account. No ‘encumbrance, lien, loan and control of any third party i.e., lender/ bank/ financial institution’ can be created over this account. The Directions clarify that no amount from this account can be utilised for re-payment or pre-payment of project loan/ facilities. Proceeds of this account can only be used for the construction and development of the project and proportionate land cost, as now defined in the Directions. The Directions permit the promoters to create ‘no-lien/ no-charge fixed deposits’ over the funds available in this account. Prior permission of the HRERA is required for carrying out any change to this account.

  3. Promoter’s Free Project Account (Free Account):

    After transferring the 70% amount from the Master Account, the remaining 30% of the receivables will be deposited in a bank account called the Free Account. The loan amount availed for developing a project and the interest to be paid on the said loan amount can be paid from the funds available in the Free Account. The amount available in this bank account can also be used for business activities related to the same project if the HRERA has not issued any instructions to the contrary to the Promoter.

 

The requirement for maintaining three bank accounts is something that has been introduced by the Directions. It also mandates that the amount to be deposited in the RERA Account should exclude pass-through charges and indirect taxes without clarifying where such amount has to be deposited. We understand that the said payments, which are to be made by the promoter, cannot be made directly from the Master Account as there is a restriction that any transfer from the Master Account can only be made to the other two accounts.  Hence, there is no clarity on this point in the Directions.

 

Charge on the Accounts

 

After the Supertech Homebuyers Case, HRERA has brought in these Directions which states that a charge/ lien cannot be created on the RERA Account.

 

Similarly, no charge/ lien can be created on the Master Account. Further, any withdrawal/ transfer from the Master Account can only be made either to the RERA Account or to the Free Account. The banking institutions are directed to ensure that no withdrawal is carried out from the Master Account except to the RERA Account or to the Free Account.

 

The Directions have gone further and created more accounts, which were not mandated either in the Act or the Rules.

 

Complications in Operating the Free Account

 

Under the Act and the Rules, there were no guidelines on the usage of the 30% of receivables which are left with the promoters after depositing the mandated 70% of receivables under the RERA Account. However, the Directions have imposed restrictions on free usage of that money by the promoter and have provided that the money in the Free

 

Account can only be utilised for ‘Business Activities related to the same project’ and cannot be utilized for any other project of the promoterSuch a condition certainly removes the free nature of the Free Account.

 

Retention of the Estimated Cost of the Project

 

Another interesting condition that the Directions has introduced is that if the estimated cost of a project is higher than the estimated amount of total receivables at any stage, then 100% of the funds lying in this account must be transferred to the RERA Complaint Separate Account, as long as this condition exists. The Act and the Rules do not mandate any such condition on the promoter. During the commencement of the project, the amount of receivables received is bound to be less than the estimated cost of the project as 100% of the flats cannot be sold at the onset of the real estate project. Hence, all the receivables will have to be deposited in the RERA Account from the Master Account.

 

There is also no clarification as to how this will work with the necessary certifications, which are required for withdrawing any amount from the RERA Account, as once the mismatch ends, 30% of the receivables will have to be deposited back in the FREE Account. With the introduction of such a condition on the promoters’ cash-strapped sector, this will worsen the liquidity crisis.

 

Challenge or Opportunity?

 

The Directions impose manifold restrictions on promoters, many of which are not provided either in the Act or the Rules. They are expected to be challenged, therefore, before a court of law sooner or later. While HRERA can argue that the Directions have been brought in to protect the rights of homebuyers and to reduce cases like Supertech Homebuyers, they will have to prove a lot more in the court of law to save these Directions from being scrapped.

 

*The authors were assisted by Siddhant S, Associate.

 

 

For further information, please contact:

 

 

Abhilash Pillai , Partner, Cyril Amarchand Mangaldas

abhilash.pillai@cyrilshroff.com