ICRA: Effective Certification Process Key For Ensuring Non-diversion Of Project Funds Through Maintenance Of Separate RERA Designated Accounts
In recent months, Real Estate Regulatory Authorities have increasingly been focusing on the management of separate designated accounts which are required to be maintained as per the provisions of the Real Estate (Regulation and Development) Act, 2016 (RERA). This is with the expectation that the proper functioning of such accounts would limit diversion of project funds. In fact, the Haryana Real Estate Regulatory Authority (HRera) and Uttar Pradesh Real Estate Regulatory Authority (UPRera) have issued notices requesting lenders and developers to comply with the separate RERA designated account requirements. Home-buyers also expect this regulation to protect their rights, and have, to that extent, asked certain RERA authorities to disclose the details of such designated accounts to the public, thus further underlining the need for increased vigilance on this financial practice. While the focus on ensuring compliance by lenders and considering public disclosure of account details are positive developments, the key to the efficacy of the regulation lies in the certification process, on which the level of checks and balances differ from lender to lender.
Commenting on the subject, Mr Shubham Jain, Vice President and Group Head – Corporate Ratings, ICRA, said “Under the RERA regime, 70% of the amounts realised from real estate project allottees (buyers) is to be deposited in a separate RERA designated no-lien no-charge bank account to cover the cost of land and construction for the given project. Withdrawals from this account are permitted in line with the percentage of completion of the project, as certified by an engineer, an architect and a chartered accountant. This imposes an additional check on the utilization of the project cash flows. Such a check is particularly important in cases where the project has sold well and generated robust collections, but financial progress on the project construction has remained low, thus giving rise to increased scope for fund diversion.”
This stipulation in the RERA regime is in sharp contrast from the prevailing situation in the pre-RERA regime, where there was a fair amount of fungibility amongst the cash flows received by a real estate developer from various projects. Surpluses after meeting debt obligations were available for utilization by the company for any purpose, including expenditure on other projects or towards land investments.
In practice, the separate RERA designated account creates an additional check, with the developer having to seek reimbursements from the account, based on the certified incremental cost incurred on the project.