India: Navigating The RERA Account & Understanding The Pitfalls

Last Updated: 15 January 2018
Article by Natasha Tuli

The Real Estate (Regulation and Development) Act, 2016 ("RERA"), has finally given India's real estate sector its first Regulator from May, 2016. The RERA seeks to bring forth transparency in the real estate sector and protect the interests of the buyers while imposing severe penalties on errant builders. According to the RERA, each State and Union Territory will have its own regulator and a set of rules to govern the functioning of the Regulator. There has been an inevitable discussion of its benefits and handicaps. One of the major areas of concern for the promoters is Section 4(2)(l)(D) of the RERA as it has a bearing on the financial outlay of the projects.

According to the above mentioned Section 4(2)(l)(D) of the RERA, a promoter is required to enclose, along with the application for registration of real estate projects, a declaration supported by an affidavit, signed by the promoter or any person authorized by the promoter, stating that 70% (seventy percent) of the amounts realised for the real estate project from the allottees, from time to time, shall be deposited in a separate escrow account to be maintained in a scheduled bank ("RERA Account"). The funds from the RERA Account shall be utilized exclusively to cover the cost of construction and the cost of acquiring land for that project. The provision goes on to state that the promoter can withdraw amounts from the RERA Account, to cover the cost of the project 'in proportion to the percentage of completion of the project ("Proportionality Clause")'.While the intention of this clause, which is to ensure that the promoter does not siphon funds collected for one project onto another (as was being done frequently), is laudable, it creates a liquidity crisis for the small and medium promoters. In any real estate project, the funds deployed in the initial stages of the development of the project is substantial but at the same time does not result in a commensurate progress of construction that would increase the level or percentage of completion of the project. This is further complicated by the fact that 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. Since land is a primary requirement for any development activity, the promoter would have to mobilize the funds for acquiring the land, incur costs towards obtaining all the required approvals and permits from the development authorities concerned for commencement of construction of the project and carry out the pre-development works on the land, wherever required. While such pre-construction costs would form a sizable portion of the total estimated project costs, the resulting contribution of such activity towards the percentage of completion of construction is minimal. Applying the Proportionality Clause would therefore constrain the promoter from withdrawing the costs already incurred on the project from the RERA Account. This provision coupled with other provisions like Section 11(1)(g) & (h) of the RERA that prevents the promoter from creating any mortgage or encumbrance over the undivided share of land (along with the constructed area) after entering into agreements of sale with an allottee could create a liquidity crisis, compelling the small and medium promoters to seek alternate funding at higher rates of interests or delay the overall construction of the project, consequently compromising the revival of the real estate sector. To overcome such practical issues arising out of the stringent implementation of Section 4(2)(l)(D) of the RERA, several State Governments have passed rules diluting the said provisions.

In pursuance of the above, the Maharashtra Government has issued rules which clarify the process of withdrawal of the amounts deposited in the RERA Account. This clarification vide Circular No. 7 of 2017 dated July 4, 2017, provides for a practicing Chartered Accountant to certify the amount that can be withdrawn from the RERA Account, by working out the actual cost incurred by the promoter towards acquiring land, and the cost incurred on construction, in proportion to the total estimated cost of the project. The total estimated cost of the project multiplied by such proportion determines the maximum amount which can be withdrawn by the promoter from the RERA Account.

Similar notifications have been issued by the Gujarat Real Estate Regulatory Authority vide Circular No. 2/ 2017 dated July 29, 2017, for the State of Gujarat, and by the Maharashtra Real Estate Regulatory Authority vide Circular No. 10/2017 dated August 4, 2017, for the Union Territories of Dadra and Nagar Haveli and Daman and Diu.

From the abovementioned notifications, it would appear that the generally accepted yardstick for withdrawal of amounts from the RERA Account is the actual 'cost incurred' on construction and on the acquisition of project land.

To elaborate by way of an example, a case where the total estimated cost of construction of a project is Rs. 500 crores could be taken; Rs. 60 crores could be the cost incurred by the promoter so far; 10% (ten percent) of the project construction could be viewed as completed; and Rs. 100 crores could be the amount that has been collected by the promoter from various allottees. In this case, Rs. 70 crores would be required to be deposited in the RERA Account, i.e., 70% (seventy percent) of Rs. 100 crores. In case of a strict adherence to Section 4(2)(l)(D) of the RERA, Rs. 50 crores may be withdrawn by the promoter from the RERA Account, i.e., 10% (ten percent) of Rs. 500 crores. However, in accordance with the notifications specified above, the promoter will be entitled to withdraw up to Rs. 60 crores from the RERA Account, i.e., (60 crores / 500 crores) x 500 crores.

Therefore, clarifications issued by the Maharashtra and Gujarat Real Estate Regulatory Authorities take a pragmatic approach as they provide a safety net to the promoters by allowing them to withdraw amounts to the extent of the costs they incur on the project. While only 2 (two) Real Estate Regulatory Authorities have so far issued clarifications on the subject, States wherein similar guidelines/clarifications have not been issued, may, in the absence of anything to the contrary, draw inference from clarifications issued by their counterparts in Maharashtra and Gujarat.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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