The Maharashtra Real Estate Regulatory Authority (the "Maha RERA or the "Authority") has vide its circular dated 8 November 2017 bearing Reference No 11/2017 ("Circular") given a welcome clarification to the provisions of Section 15 of The Real Estate (Regulation and Development) Act, 2016 ("RERA Act"). In order to appreciate the Circular, it is pertinent to note the provisions of Section 15 of the RERA Act.
Section 15 inter-alia states that the promoter shall not transfer or assign his majority rights and liabilities in respect of a real estate project to a third party without obtaining prior written consent from two-thirds of the allottees, except the promoter, and without the prior written approval of the Authority. Provided that such transfer or assignment shall not affect the allotment or sale of the apartments, plots or buildings as the case may be, in the real estate project made by the erstwhile promoters.
Circumstances surrounding the issuance of the Circular
Lenders were in a quandary as to their rights in case of an enforcement of mortgage or charge given by the promoter.
There was also certain ambiguity amongst stake holders whether Section 15 applied to a case where a promoter developer would sell shares in the entity to any person including a private equity player or it was applicable only in a case where the promoter developer would assign majority of its development rights to another developer. Further, the process of seeking approval of the Authority was not spelt out in the provisions of Section 15 or the rules thereunder.
Consequences vis-à-vis Section 15 in case of enforcement by a lender or creditor or a financial institution on default
In case a transfer is initiated by a third party such as a financial institution or creditors or by operation of law or by enforcing the security and where such details such as loan and charge on the real estate project is disclosed in the registration details on the website of Maha RERA, then in such cases the promoter shall write to the Secretary of Maha RERA within 7 days of being aware of impending or potential transfer arising out of enforcement of security or mortgage. The promoter shall simultaneously inform each and every allottee of the real estate project of such potential transfer.
Within a period of 7 days from the date of such transfer being effected by the creditor, financial institution, such creditor or financial institution, as the case may be, shall intimate to each of the allottees and secretary of Maha RERA of enforcement of security which has resulted in the transfer of ownership of the promoter organisation or transfer of the real estate project. It is pertinent to note that in such situations, no permission of Maha RERA and/or allottees would be required.
The Maharashtra Real Estate (Regulation and Development) (Registration of real estate projects, Registration of real estate agents, rates of interest and disclosures on website) Rules, 2017 explains who are included in persons who have taken mortgage of a real estate project from the promoter. The explanation to Rule 8 of the aforesaid Rules includes Scheduled Banks, Housing Finance Companies, Insurance Companies, Non-Banking Finance Companies Operating as Asset Finance Companies, Investment Companies, Loan Companies, Investment Finance Companies, Infrastructure Debt Funds, Micro-Finance Institutions, Foreign Direct Investors, Private Equity Funds and Real Estate Investment Trust.
Process to be followed by the creditors or financial institutions pursuant to transfer
Upon such transfer, the creditor or financial institution or new promoter shall then apply for necessary corrections in the existing registration details and shall from time to time upload supporting documents such as land titles and building permissions
The creditor or financial institution or new promoter shall also be required to upload on the website of Maha RERA, a registered undertaking stating that it shall comply with all obligations under agreement for sale executed by the erstwhile outgoing promoter with respect to the allottees of the real estate project and has assumed all the obligations of such erstwhile outgoing promoter under the RERA Act.
Examples of Takeover under the Circular
Some examples of takeover or enforcement of mortgage by creditors or financial institutions provided under the Circular:
- invocation of pledge of shares of the promoter company by the pledgee;
- takeover of asset of the real estate project by banks, financial institution, asset reconstruction company under SARFAESI;
- transfer of the project by bank, financial institution, asset reconstruction company under SARFAESI or under Insolvency and Banking Code, 2016;
- takeover of management of the promoter in case of Insolvency and Banking Code, 2016.
Take away for Lenders
The Lenders would not be required to take permission of Maha RERA or of 2/3rd of the allottees at the time of enforcement, if such details of the mortgage or charge is uploaded on the website of Maha RERA. This clarification brings in a huge relief for lenders who would not be required to go through the process of seeking approvals in the event of a default by the promoter company.
Stake Sale in the Promoter Entity
The Circular inter-alia clarifies that the provisions of Section 15, which inter-alia requires approval of 2/3rd of the allottees and also permission of the Authority, shall not apply to the following cases:
- changes in internal shareholding or constituents of a promoter's organisation, that does not affect obligations and liabilities with respect to allottees and the rights and liabilities of promoter's organisation;
- any conversion of the promoter entity under any statute, i.e.
- Conversion of a partnership firm into a limited liability partnership or a private limited company;
- Conversion of a private limited company or unlisted company to a limited liability partnership or otherwise;
- Proprietorship change by succession of legal heirs.
Process for seeking approval of authority where the promoter entity assigns or transfers its majority interest in the real estate project
In case a promoter entity desires to transfer or assign its majority interest in a real estate project, it shall apply to the Maha RERA for its consent with the approval of 2/3rd of the allottees as on the date of application in the real estate project.
On receipt of such application from the promoter entity, the Secretary of Maha RERA shall initiate action through the legal wing of Maha RERA who would take necessary steps to obtain approval of Maha RERA, which may include scheduling a hearing. Within a period of 1 month from the date of filing of the application by the promoter entity, Maha RERA shall pass an order either granting approval (with or without any conditions) or rejecting such application.
Process to be followed by the new promoter pursuant to transfer
Pursuant to the assignment or transfer by the promoter after receipt of the approval of Maha RERA, within a period of 7 days, the new incoming promoter shall be required to apply to Maha RERA for necessary corrections in the registration details. The new incoming promoter shall also be required to upload required supporting documents, such as land title, building plan approval as and when obtained.
The new incoming promoter shall also be required to upload on the website of Maha RERA, a registered undertaking stating that it shall comply with all obligations under agreement for sale executed by the erstwhile outgoing promoter with respect to the allottees of the real estate project and has assumed all the obligations of such erstwhile outgoing promoter under RERA Act.
Amalgamation of the Promoter Company, whether a transfer under Section 15 of the RERA Act?
It has been clarified by Maha RERA vide its Circular that an amalgamation or merger of a company in which the amalgamating company has one or more real estate projects registered with Maha RERA and is voluntarily initiated by the promoter after 30 April 2017, such amalgamations and mergers shall be regarded as a transfer initiated by the promoter and such promoter shall have to follow the procedure prescribed in the Circular for obtaining permission of Maha RERA and provisions of Section 15 of the RERA Act shall be applicable.
In cases where the amalgamation or merger or demerger of the company is regarded as a transfer under Section 47 of the Income Tax Act, 1961 or in case where 75% of the shareholders in the resultant company on amalgamation or merger or demerger remain the same, the provision of Section 15 shall not be applicable and hence permission of the allottees shall not be required.
Section 47 of the Income Tax Act, 1961 with respect to amalgamation inter-alia covers (i) any transfer of a capital asset in amalgamations by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company and (ii) any transfer in a scheme of amalgamation of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company if at least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company and such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated. It is pertinent to note that aforesaid exception under Section 47 is applicable only if the transfer is of a capital asset and not a stock in trade.
The Circular helps dispel the ambiguity doing the rounds in the market in so far as enforcement of mortgages by lenders was concerned, provides for exemptions from requirement of obtaining permission of Maha RERA and the 2/3rd allottees and also lays down the process for seeking approval of the authority in case a promoter desires to assign its interest in the real estate project in favour of any third party.
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