Haryana passes directions to restrict fund diversion

By Tanvi Choksey and Kawaljeet Kaur, SNG & Partners

The Haryana Real Estate Regulatory Authority (HRERA) has, in order to monitor the usage of funds by promoters and curb diversion, tightened the noose on the promoters by issuing new directions – Haryana Real Estate Regulatory Authority, Gurugram Bank Accounts for the Registered Projects Directions, 2019. These directions lay down many firsts by HRERA in the area of evolving real estate laws.

Waterfall mechanism: While the Real Estate (Regulation and Development) Act, 2016, has under section 4(2)(1)(D) made it compulsory for 70% of the amounts realized for a real estate project from the allottees to be deposited in a separate account, the directions passed by HRERA specifically provide for the waterfall mechanism with respect to receivables.

Tanvi Choksey
Tanvi Choksey
SNG & Partners

Under the directions, promoters are mandatorily required to open and maintain a project’s master account, a RERA compliant separate account (RERA account) and a promoter’s free project account.

Promoters should deposit the entire amount realized from the allottees in the master account from time to time. Out of the total receivables deposited in the master account, at the end of each business day, 70% of the receivables should be transferred to the RERA account and the remaining 30% of the receivables should be transferred to the free account. In case the estimated cost of a project is higher than the estimated amount of total receivables, the directions mandate that 100% of the amounts lying in the master account should be transferred to the RERA account, as long as such a situation exists. This new condition is stricter than what is envisaged in the act.

Restrictions on use: Under the directions, the promoters shall not be allowed to repay or prepay their loan from the master account or the RERA account. There will be no restrictions on creation of fixed deposits from the amount lying in the RERA account, however, no charge or lien shall be permitted to be created on such deposits and such deposits shall only be created with the bank operating the RERA account.

Kawaljeet Kaur
Kawaljeet Kaur
SNG & Partners

As far as withdrawal from the free account is concerned, the promoters should be able to deposit and withdraw any amount, however, the funds in the free account should only be used for business activities related to the same project.

The directions also allow the buyers to obtain refunds of the amount along with interest paid by them from the RERA account or free account if they wish to withdraw from the project before its completion.

Charge on the accounts: In another first, the authorities have mandated that the master account and the RERA account shall always remain free from all encumbrances, lien, loan and control of any third party, that is lender or bank or financial institution. No such restriction will be applicable on the free account. The lenders shall be at liberty to create a charge on the free account and the promoters who have borrowed from banks or financial institutions shall also be allowed to repay or prepay such loans from the money deposited in the free account.

Implications and ambiguities: Against the backdrop of increased incidences of impropriety in the real estate sector, these directions will go a long way to protect the interests of the buyers. However, the restrictions such as retention of 100% amount in the RERA account in the event of a higher estimated cost of project and the condition for the amounts in the free account to be used only for business activities, the meaning of which is not provided in the act or the directions will worsen the condition of the developers who are already neck deep in the liquidity crisis.

Further, the amounts lying in the RERA account, which should be used only towards the cost of construction and proportionate land cost as per the directions, may add to the woes of various cash strapped developers as the directions specifically restrict the repayment or prepayment of loans from the RERA account.

This leaves the developers to repay loans from only 30% of receivables. Such restriction is contrary to other state rules under RERA including the Maharashtra Real Estate Regulatory Authority (General) Regulations, 2017 rules, which allow the construction cost to be paid from the RERA account and the meaning of construction cost includes the money payable to financial institutions, scheduled banks, non-banking financial institutions or money lenders on construction funding. While this is a welcome move for the home buyers, it may adversely impact the lenders and the developers.

SNG & Partners has offices in New Delhi, Mumbai and Singapore. Tanvi Choksey and Kawaljeet Kaur are associates at the firm.

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