he Karnataka Real Estate Regulatory Authority (Authority) on 19
July 2023 issued a notification (Notification) which has inter alia
added to the scrutiny of funds (borrowed from lenders) raised in
connection with real estate projects.
As per section 4 of the Real Estate (Regulation and Development)
Act, 2016 (Act), a promoter (which includes developers of real
estate projects as per the meaning ascribed to it under the Act) is
under an obligation to deposit 70% (seventy per cent) of the
amounts realised for the real estate project from the allottees, in
a separate RERA project designated account (as defined under
section 4(2)(l)(D) of the Act) (Designated Account), which is 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
(Designated Purpose).
It was observed by the Authority that the promoters of the project
were raising additional funds via borrowing from banks, financial
institutions, and other lenders against the mortgage of project
land, apartments, and units in the project. Further, the Authority
observed that the money raised from such borrowing was not being
fully realised towards the Designated Purpose.
To ensure that the funds borrowed for the purpose of the project
are utilised for the Designated Purpose, the Authority via the
Notification has bought about the following changes:
i. Deposit of borrowed money into the Designated
Account:
The Authority has mandated that the promoter of the project shall
deposit the entire amount borrowed for the purpose of the project
into the Designated Account of the project and the money so
deposited shall be utilised and withdrawn only for the Designated
Purpose.
ii. Bifurcation and apportionment of the borrowed
amount:
If the promoter borrows money for the project and registers the
project phase wise as per the Act, the promoter shall bifurcate and
apportion the amount towards various phases and report the same
during the quarterly updates along with the bank statement or
chartered accountants' certificate by way of an annexure.
iii. Disbursal of borrowed sum in the Designated Account
and confirmation from chartered accountant for the
same:
The banks, financial institutions, or other lenders lending to the
promoter shall ensure the disbursal of borrowed funds only into the
Designated Account. Separately, the chartered accountant issuing a
certificate as required under the Act shall report whether the
amount borrowed for the purpose of the project has been deposited
into the Designated Account or not.
iv. Effect on existing projects & power of the
Authority to enforce the Notification:
In cases where the promoters have already borrowed money for the
purpose of the project, and they have not utilised any portion of
such money to the respective project shall deposit the unutilised
portion of the money into the Designated Account within 3 months
from the date of the Notification. Therefore, to this extent, the
Notification is effective retrospectively.
Separately, the Notification gives the Authority the power to call
for any information or documents from the promoters by issuing a
notice in order to enforce the Notification.
Comment
With the introduction of the Notification the borrowing of funds in
the name of the project will be tracked, thus leading to better
fund management and presumably no diversion of funds. The flip side
is that the promoters while borrowing funds have to be specifically
cautious when defining the 'purpose' for which they are
borrowing the funds from any financial institution, bank, other
lenders, as improper classification of the 'purpose' could
lead to the borrowing being hit by the Notification. This will
greatly impact the industry practice of raising debt funds by
creating a charge on the project, towards the development of
project and other working capital or general corporate purposes.
The lender and borrowers would have to upfront split the amounts
into borrowing for projects development costs and any other
purposes, since the former will be disbursed directly into the
Designated Account and utilised only for the Designated
Purpose.
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