India: Analysis Of Recent Maha RERA Directions On Change In Promoter

Last Updated: 12 July 2019
Article by Abhishek Sharma and Amit H Wadhwani

The real estate sector post enactment of the Real Estate (Regulation and Development) Act, 2016 (Act) is witnessing major consolidation primarily on account of financial constraints faced by small and mid-sized developers. Such consolidation has resulted in developers looking to either exit from their existing projects or enter into collaboration with large established developers for completing such projects.

Hence, in the present scenario, it is of the utmost importance for the industry to know the present legal regime under RERA dealing with new developers / promoters taking over an ongoing projects from existing promoters or from lenders during the process of enforcement of their security over the project.

Anticipating the likelihood of consolidation and collaboration in the industry, the legislature made specific provisions under section 15 of the Act for dealing with a change in promoter. These provisions mandate a promoter of a registered real estate project to obtain prior approval of Maharashtra Real Estate Regulatory Authority (Maha RERA) and two-thirds of the allottees for transferring majority rights and liabilities in respect of a project to a third party. Acknowledging the importance of these provisions, Maha RERA proactively issued a circular on November 8, 2017 (2017 Circular) prescribing the procedure for a change in promoter.

On June 4, 2019, Maha RERA issued another Circular (2019 Circular) specifying the revised procedure to be followed for transferring majority rights and liabilities of a promoter in a real estate project to a third party. The 2019 Circular not only provides the procedure to be followed by a promoter for obtaining aforesaid approvals of Maha RERA and two-thirds of the allottees, but also specifies certain kinds of transfers that are exempted from the requirement to obtain the aforesaid approvals. Briefly, the 2019 Circular states as follows:

1. Change in Internal Shareholding:

Changes in internal shareholding or constituents of a promoter's organisation shall not require the approval of two thirds of the allottees or the Maha RERA provided

such changes don't affect: (i) the obligations and liabilities with respect to the allottees; and (ii) the rights and liabilities of the promoter's organisation.

Maha RERA should clarify whether or not the aforesaid expression "internal shareholding" is used only in reference to transfer of shares between existing shareholders of the promoter entity or would it also include transfer of shares by existing shareholders to third parties. In this regards one should take note that provisions of Section 15 of the Act, only restricts transfer of rights/obligations of a promoter in the "real estate project" (which expression is defined under the Act to essentially mean development of building/s) and does not expressly restrict transfer of shares of promoter entity. However, courts will need to finally decide whether or not transfer of entire / majority shareholding of promoter entity resulting in change in management and control of such promoter entity to a third party falls within the purview of Section 15 of the Act.

2. Conversion:

Any conversion of the promoter entity from: (i) a partnership firm to a Limited Liability Partnership (LLP) or private limited company; (ii) a private limited company or an unlisted company to a LLP or otherwise; (iii) a proprietorship change by succession to legal heirs would not require two-thirds consent of allottees or Maha RERA.

3. Merger / Amalgamation:

An amalgamation or merger that is voluntarily initiated by the promoter in which the amalgamating company has one or more registered projects, and wherein the registered project is transferred, shall be regarded as a transfer initiated by the promoter and the promoter would be required to obtain the approval of two thirds of the allottees and Maha RERA.However, such approval is not required if: (i) the amalgamation,merger or demerger of the companies, is not regarded as a transfer under Section 47 of the Income Tax Act, 1961; or (ii) where 75% of the shareholders of the existing company remain the same in the resultant company.

For an amalgamation/ merger or demerger to fall within the scope of Section 47 of the Income Tax Act, 1961, amongst other conditions as prescribed thereunder, the following two principle conditions needs to be fulfilled: (i) all liabilities of the amalgamating company / demerged company relating to the demerged undertaking, should be transferred to the amalgamated company / resulting company; and (ii) three-quarters of the shareholders of the amalgamating company / demerged company should be shareholders of the new amalgamated company / resulting company

4. Transfer Initiated by Financial Institutions / Creditors Etc.

A bare reading of the 2019 Circular suggests that approval of allottees or Maha RERA is not required in cases where transfer of the promoters' rights and obligations in the real estate project is pursuant to enforcement of security by financial institutions or creditors or pursuant to the operation of law, provided that their loan and charge over the project was disclosed in the registration details of the project on the website of Maha RERA. This was also the position under the 2017 Circular.The 2019 Circular also provides a few examples of enforcement of security such as: (i) invocation of pledge of shares of promoters; (ii) takeover of the project under the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 and the Insolvency and Bankruptcy Code, 2016 (IBC); and (iii) takeover of management of promoter in the case of the IBC.

In view of the above, it is imperative that the lenders should ensure that their loans and charge over the project get disclosed by the promoter on the website of RERA to ensure smooth enforceability of their security.

Although, the Act clearly prohibits a promoter from creating a charge / mortgage over apartments which are already allotted / sold by the promoter, however, the Act does not contain any provision expressly restricting the promoter from creating a charge / mortgage over unsold apartments or rights of the promoter over land and development thereof.

Further, the new promoters should also keep in mind that in case of acquisition of the promoter entity through the process of the IBC, the new management would be required to assume all liabilities of the erstwhile promoter under the Act (such as payment of interest / penalties, and completing the project within the declared timeline).

The 2019 Circular prescribes the following procedure to be followed for change in a promoter pursuant to lenders enforcing their security over the project:

  • First, the promoter shall inform Maha RERA in writing with the format prescribed in Annexure "A", within seven days of being made aware of the impending or potential transfer arising out of enforcement of the security or mortgage.
  • Simultaneously, the promoter shall inform each and every allottee regarding such impending or potential transfer.
  • Within seven days of the transfer being effected by the financial institution / creditors, such financial institution / creditors shall intimate to each of the allottees and Maha RERA of the enforcement of security and transfer of ownership of the promoter organisation or transfer of the project.
  • Thereafter, the financial creditor (acting as new promoter) or a new promoter (appointed by financial institutions) shall apply to Maha RERA for making necessary corrections to the registration details of the project.
  • The financial creditor shall submit an undertaking stating that they shall comply with all the obligations under the agreement for sale executed by the erstwhile promoter with the allottees and assume all the obligations of the erstwhile promoter.

It is pertinent to note that Maha RERA has, in the 2019 Circular, now inserted a requirement for the promoter to submit to Maha RERA on its letterhead, an application prescribed in Annexure A, which was not the case under 2017 Circular.

Annexure A is in the nature of an application by the promoter seeking permission of Maha RERA for transfer and requires enclosure of consents from two-thirds of the allottees. Thus, due to the aforesaid insertion of the Annexure A reference, the 2019 Circular could be interpreted to mean that approval of two-thirds of the allottees and Maha RERA would be required to be obtained even for enforcement of security by lenders resulting in a change of promoter.

Such an interpretation would cause great stress on the lenders as it is unlikely that the promoter would be willing to take any steps for either obtaining consent of the allottees or Maha RERA in cases where the lender is enforcing its security upon default of the promoter. Also, this would discourage the lenders from financing the promoters due to the challenges that would be involved in enforcing their security over the project. Moreover, such an interpretation would also be contrary to the Interim Order dated March 16, 2018 of Maha RERA passed in the matter of Mrs. Nanda Pooniwala & Ors Vs. JVPD Properties Private Limited, in which Maha RERA took the view that under the 2017 Circular, a lender was not required to obtain approval of two-thirds of the allottees and Maha RERA for enforcement of its security. Thus, it is important that Maha RERA should immediately issue a clarification to address the aforesaid inconsistency.

Nevertheless, if the validity of 2019 circular is challenged before higher judicial forums, the judicial forums will need to determine whether enforcement of security by lenders over the project (created either prior to or post allotment/sale of apartment) would fall within the purview of Section 15 of the Act as it eventually results in transfer of rights and obligations of the promoter, although it is not a voluntary transfer by promoter.

5. Process to be Followed where Approvals are Required:

The promoter is required to follow the following process:

  1. The promoter shall first obtain consent of two-thirds of the allottees of the project.
  2. The promoter shall apply to Maha RERA with a format prescribed in Annexure "A" along with the consent of two-thirds of the allottees as on the date of application.
  3. Under its application as prescribed under Annexure A, the existing promoter in required to make the following declarations to Maha RERA:

a. There are no pending cases before any court / National Company Law Tribunal / or any authorised body regarding the transfer of the promoter's rights and liabilities with respect to the project.

b. There is no bar, in the transfer of rights and liabilities to a third party, from any of the financial institutions or financers who have a charge on the project.

c. There is no prohibitory order passed by any court of law against the transfer of the present project to a third party.

4. Maha RERA shall within one month of filing of such application either grant an approval (with or without any conditions) or reject such application.

5. After receiving the approval of Maha RERA, the new promoter shall submit an undertaking stating that they shall comply with all the obligations under the agreement for sale executed by the erstwhile promoter with the allottees and assume all the obligations of the erstwhile promoter.

The aforesaid declarations as sought from the existing promoter under Annexure A is a new requirement under the 2019 Circular and was not contemplated under the 2017 Circular. The aforesaid declaration is meant to protect the right of lenders having a charge over the project and is also meant to ensure that prohibitory orders of the judicial forums are not being breached on account of transfer of the project.

This is a laudable step taken by Maha RERA that will go a long way to boosting the confidence of lenders and new promoters. However, a declaration sought from the existing promoter declaring there are no pending proceedings as regards the transfer of its rights / obligations with respect to the project (without linking it to the existence of a prohibitory order), could create complications for the existing promoter looking to exit the project.

One cannot rule out the possibility of existing promoters adversaries instituting frivolous proceedings regarding the transfer or assignment in order to scuttle the process of transfer of the project. Thus, such a declaration would not only create a hurdle in consolidation of ongoing projects, but also in a way adversely affect the allottees by further delaying the revival of the project.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions