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Builders must spend 70% of buyers' money on construction: RERA

Haryana Real Estate Regulatory Authority has directed the Gurugram Police to register a criminal case against three NBFCs for violating Section 4(2)(l)(D) of the RERA Act while a show cause notice has reportedly been issued to Supertech Limited

twitter-logo BusinessToday.In        Last Updated: April 25, 2019  | 13:57 IST
Builders must spend 70% of buyers' money on construction: RERA

Three NBFCs, Indiabulls Housing Finance Limited, Industrial Finance Corporation of India Limited and PNB Housing Finance Limited, have come under the scanner for not adhering to an important provision in the Real Estate (Regulation and Development) Act, 2016.

As per Section 4(2)(l)(D) of the Act, "70% of the amount realised 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". It further specifies that any amount withdrawn from this account shall be utilised only to cover project costs and has to be "certified" by an engineer, an architect and a chartered accountant to the effect that the withdrawal "is in proportion to the percentage of completion of the project".

The Haryana Real Estate Regulatory Authority (HRERA) yesterday directed the Gurugram Police to register a criminal case against the above-mentioned lenders for misappropriation of crores of rupees deposited by the allottees for the completion of the projects namely Araville, Basera, Hues and Hill Town in Gurugram, The Hindu reported. All these projects are being rolled out by Supertech Limited, a leading realty player. HRERA Gurugram Chairman K.K Khandelwal, in a press conference, added that the authority has taken a serious note of the fact that the NBFCs had fraudulently and arbitrarily withdrawn entire amount of the receivable deposited in the RERA Account, which is a flagrant violation of the Act.

He reportedly added that this was probably the first-of-its-kind decision since the regulatory authority was constituted, where it had directed the police to initiate action against financiers of realty projects.

Separately, on April 3, Uttar Pradesh RERA sent off letters to the zonal heads of several banks public and private sector banks stressing the need for strict compliance with these provisions. "It has come to the notice of UP RERA that some of the promoters are not complying with the statutory provisions of the law and withdrawing the amount from the designated account without submitting the requisite certificate with the bank or sometimes withdrawing amount in excess of the work done in the project," read the letter.

It added that some of the banks, particularly the ones that have sanctioned loans to promoters, "arbitrarily adjust the entire amount deposited in the account against the outstanding loan of the promoter", instead of transferring 70% of the money collected towards construction and payment of land cost, as mandated by the law. The letter hence asked the banks to issue necessary instructions to their respective staff to ensure compliance.

According to The Times of India, HRERA has made it clear that before builders make a provision for any purpose, 70% of the money collected from allottees must go to another escrow account, which should be called RERA account, to be maintained for the purpose of construction of the project and meet the land cost. Khandelwal also pointed out that the developer "cannot create lien on the project" to raise money for a purpose other than completing construction of a project. A builder can use only 30% of the amount collected from allottees for other purposes, including creating charge in favour of lending institutions to repay loans.

He added that the RERA provision was introduced to address the mischief previously being committed by unscrupulous builders to divert funds collected from homebuyers to other projects or for different purposes entirely. Banks and lending institutions typically see their loans serviced through the escrow accounts opened by developers where all the receivables get deposited. If the collection from allottees in a particular month is less than the instalment due to be paid to the lender, the entire amount in the escrow account reportedly goes to lenders. Due to this state of affairs, in the event a realty firm suffers a cash crunch, projects often end up stalled. Section 4(2)(l)(D) of the Act aims to clamp down on such practices.

In the meantime, Indiabulls Housing Finance Limited, Industrial Finance Corporation of India Limited and PNB Housing Finance Limited have reportedly been directed to deposit back the excess amount withdrawn by them in violation of this provision and a show cause notice has been issued to Supertech Limited, asking it why penal proceedings should not be initiated against it for non-compliance.

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