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Builders can Keep Funds in Separate Account Instead of Escrow Account: Will RERA Prevent Misuse?

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Separate Builders Account Can Be Used Instead Of Escrow Account.

As per the Act, each state is supposed to set up its own Regulatory Authority which will frame regulations and rules according to the Act

The May 1, 2017, deadline for the Real Estate (Regulation and Development) Act, 2016 (RERA) to become effective in the entire country stands sacrosanct.

As per the Act, each state is supposed to set up its own Regulatory Authority which will frame regulations and rules according to the Act.

One of the major bones of contention in the real estate sector was the diversion of funds by the builders into different projects or for buying new land. Therefore, timely completion of projects suffered, for lack of funds, resulting in a delay in possession of homes, even after paying the money on time by the buyers.

Promoter’s promise
To start with, every promoter shall make an application to the Regulatory Authority for registration of the real estate project in the state. The promoter in addition to several other mandatory documents will have to submit a declaration, supported by an affidavit, stating that 70 percent of the amount realised for the real estate project from the buyers, from time to time, shall be deposited in a separate account to be maintained by a scheduled bank to cover the cost of construction and the land cost and shall be used only for that purpose.

Impact
To some extent, maintenance of a separate account, the withdrawals from which, will be tracked, thus leading to better fund management and presumably no diversion of funds. According to Ramesh Nair, CEO & Country Head, JLL India, “A developer will now be forced to use the project accruals for the development of the same project and will have little room for fund manipulation.”

Not an escrow but a separate account
Contrary to what is commonly known and what the initial real estate bill talked about the ‘escrow account’, the RERA Act as it stands today, says, “The account has to be self-maintained and is not an escrow account requiring the approval of the Authority for withdrawal.”

As per the RERA Act, the promoter has to maintain a ‘separate account’ for every project undertaken wherein 70 percent of the money received from the buyers shall be deposited. Such funds can only be used for the purposes of construction and land cost. Such a fund can be maintained with any scheduled bank. “In RERA, escrow and separate accounts mean one and the same thing”, says Nair.

Withdrawals from the separate account
The withdrawal from the separate account will have to be in proportion to the percentage of completion of the project after it is certified by an engineer, an architect and a chartered accountant that the withdrawal is in proportion to the percentage of completion of the project. Harmit Chawla, Managing Director at HCorp Realty says, “It will be better if there is transparency and transactions in such separate accounts are made accessible to customers of the project online, if not to the public at large.”

How an escrow account could have helped
In an escrow account, the bank and the account holder (the builder) enter into an agreement and appoints a trustee for the account. In real estate projects, the banks itself would be the trustees. The role of the trustees would be to release the funds as per the terms and conditions of the agreement. In the absence of trustees and an arrangement of an escrow account, the element of misuse may come back to haunt the industry.

Here’s what an escrow account would mean in legal terms. Khaitan & Co says:, “An escrow account is a contractual arrangement entered between two contracting parties who mutually agree to open an account with a 3rd party / bank / security trustee (called the escrow agent) wherein the monetary consideration relating to the contract is kept deposited with such escrow agent and is released to either party based upon the fulfillment or non-fulfillment of contract.”

And, what will be a separate account? “A separate account is a current account opened in the name of the promoter with a scheduled bank. This is like any other account held by the promoter in his name, informs Khaitan & Co.

Sanction limits and audit
To avoid any misuse of the funds, the promoter is required to get his accounts audited within six months after the end of every financial year by a chartered accountant in practice, and shall produce a statement of accounts duly certified and signed by such chartered accountant and it shall be verified during the audit that the amounts collected for a particular project have been utilized for the project and the withdrawal has been in compliance with the proportion to the percentage of completion of the project.

Project in phases
Where the real estate project is to be developed in phases, every such phase shall be considered a standalone real estate project, and the promoter shall obtain registration under this Act for each phase separately. Therefore, such separate account will have to be maintained for each such registered phase of the project.

Conclusion
“Technically an ‘escrow account’ would have been safer from the end-user perspective. However, even in a ‘separate account’, the developer has to adhere to the RERA rules,” feels Khaitan & Co. The purpose of maintaining a separate account is to ensure that project funds are not diverted and projects are completed on time. Nair says, “The developer will have to manage funds more judiciously as he will have to stick to project timelines in order to avoid the penalties involved.”

What remains to be seen is how effective the utilisation of funds happen through the separate account, the withdrawals from which will not require approvals of the regulator. The auditors need to be made equally responsible if mis-management of funds take space. Under the aegis of the ministry, the real estate buyers will be putting full faith on the state level regulators. The regulators need to ensure that the builders do not take the consumers for a ride anymore by keeping in place, a proper tracking and monitoring mechanism of the funds.

Source: ET Realty

Regulations

373 Maharashtra Cities To Fall Under PMAY Scheme

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The state of Maharashtra has added 232 cities to the existing 142 which makes it 373 cities under the Pradhan Mantri Awas Yojana Scheme (PMAY).

The officials at the housing department feel that this step will aid the government take up more projects under the PMAY scheme.

Sachin Kulkarni, Builder shared his concerns over the lack of coordination between the department in executing PMAY projects. He said, “This is a good sign. However, the PMO’s seriousness in promoting HFA is diluted by the time it reaches the authorities. Apart from collecting application from interested beneficiaries, nothing has moved on the ground in urban centres. I hope that this initiative moves on fast track”.

Maharashtra CM Devendra Fadnavis recently states that the in order to create more housing stock the state’s Slum Rehabilitation Authority scheme be brought under PMAY so that it can receive the subsidy to create more affordable housing. He clearly mentioned that the government intends to create more housing stock and it was taking various initiatives and making policy changes for it.

Also Read- Affordable Housing To Get A Boost With PMAY’s Scope To Be Extended To Private Lands

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Regulations

Real Estate Sector May Fall Under GST What Does It Mean For Buyers?

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One after the other the real estate sector has witnessed massive policy and law changes in its systems. Nonetheless, the tide has not passed yet. The GST council will take up a proposal to bring it under the uniform nationwide levy.

As the industry is still recovering from the RERA Act, the finance minister, Arun Jaitley said that there is a strong case to include real estate in the new indirect tax regime. He said this last week and also mentioned that GST Council will discuss it in November.

At present, the home buyers are paying 12 percent GST on under-construction properties. This percentage includes two taxes which are stamp duty and registration. The rate of which varies in each state but GST will make them uniform.

Santosh Dalvi, KPMG India partner (indirect tax) said, “If the entire real estate is brought under GST, they would have to abolish the stamp duty and we don’t know how the government plans to compensate the states for their loss.”

The stamp duty with registration and GST comes to approximately 18 percent for under construction properties. He further said, “So, it’s important to look at what rate it will be taxed at. We can then look at consumer prices”.

While agreeing, Bipin Sapra, EY partner (indirect tax), added, “It’s going to be a test for the government”.

Developers also pay taxes on raw materials. However, unlike other businesses, they don’t get any tax refunds through input credit. GST taxes every stage of the business activity to better compliance and compensates for it by permitting refunds.

Anuj Puri, Anarock Property Consultants chairman, said “By including real estate under GST, builders can get a fair amount of input credit, helping bring down costs,” He added that it would make homes cheaper for buyers.

According to Sapra, it will depend on the tax rate applicable.

Niranjan Hiranandani, co-founder of Hiranandani Group said, “Real estate under GST ambit means consumers will only have to pay one final tax.” He stated that with the commencement of RERA it brings transparency and GST would reduce the burden in terms of taxes payable while buying the home. He concluded, “Not only will this create positive sentiment but it should also boost actual sales”.

Also Read: Affordable Housing Is The Changing Face Of Indian Real Estate

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Home Buyers Will Be Covered Against Builders Who Are Going Bankrupt

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In a move to protect home buyers from builders declaring their bankruptcy, the Insolvency & Bankruptcy Board of India (IBBI) has amended rules which make it necessary for any company to showcase how they have dealt with interests of all stakeholders. This is directed towards companies like Jaypee Infratech and some of the entities of Amrapali Group.

The regulator has informed about the revised rules last week. This will ensure that banks and other creditors do not get away by protecting their interests at the expense of others who are impacted by the action.  Banks are part of the creditors’ committee. They become an important decision-making body after a company is admitted for bankruptcy.

An expert bankruptcy lawyer said, “The change in the rules has plugged a gap as flat buyers are of the view that there is nothing to protect their interests.”

According to the new law that was enacted last year intends to speed up the resolution process in a period of 180 days, with a possible extension of 90 days. This will be done by appointing insolvency resolution professionals who will take charge of the company’s operations and prepare a plan. As per the law, an information memorandum will be finalized if the creditor’s committee is willing to take applications from other interested companies to take over the company.

The insolvency experts say that the law providing for the plan binds corporate debtor (the company) and its members, employees, guarantors, and creditors, other stakeholders involved in the resolution plan. However, there are no obligations mentioned in the rule to give any treatment to the stakeholders other than the financial creditors (banks) and operational creditors, which includes vendors and others who may have dues.

The National Company Law Tribunal, based on the comfort provided by the revised rules, will choose the final resolution plan based on bids that are received. The lawyer further said, “The tribunal will not clear the resolution plan without giving notice to all stakeholders and the flat buyers can raise objections at that point of time.”

Also Read: Tanvi Group Fail To Deliver Homes And Declare Bankruptcy

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