Developers can’t use buyers’ funds to repay loans, say UP-RERA & Haryana RERA

GURUGRAM | NOIDA: Developers should not repay loans taken from banks and financial institutions by using 70% of the total amount collected from buyers and allottees of a project in escrow accounts, both HRera and UPRera have ordered. This amount is meant to complete construction of the project and meet the land cost, the regulatory authorities said.
In a case in Gurgaon, the local bench of HRera has directed the police commissioner to register a criminal case against Indiabulls Housing Finance Limited, Industrial Finance Corporation of India Limited and PNB Housing Finance Limited for using money from the 70% of the amount collected from buyers and allottees, which it said should be used to complete construction of the project as per the Rera Act.
HRera’s Gurgaon chief KK Khandelwal said it is probably the first-of-its-kind decision since the regulatory authority is constituted, in which it has asked the police to initiate action against the financers of the realty project.
The authority has taken a serious note of the fact that lending institutions “fraudulently and arbitrarily withdrew 100% of the receivable deposited in the Rera account in violation of Section 4(2)(l)(D) of Rera, 2016”.
According to the Rera provision, “70% of the amounts realised for the realty project from the allottees, from time to time, shall be deposited in a separate account to be maintained in a bank to cover the cost of construction and the land cost, and shall be used only for that purpose.”
The builder can use only 30% of the amount collected from allottees for other purposes, including creating charge in favour of lending institutions to repay loans.
In the normal course, lending banks and institutions get repayment of their loans from the escrow accounts opened by developers where all the receivables get deposited.
If the collection from allottees in a particular month is less than the installment supposed to be paid to lending banks and institutions, the entire amount in the escrow account goes to lenders. But this leaves the project high and dry owing to cash crunch, and the construction could be stalled.
Khandelwal said before making a provision for any purpose, 70% of the money collected from allottees must go to another escrow account, which should be called Rera account, to be maintained for the purpose of construction of the project and meet the land cost under the supervision of Rera.
Khandelwal said the developer “cannot create lien on the project” to raise money for a purpose other than completing construction of a project.
He also said the provision in law is to address the mischief, earlier being committed by unscrupulous builders to divert amount realised from the allottees to other projects or for different purposes other than the project, for which amount has been deposited by the allottees.
UP Rera in a letter to various banks said, “It is obligatory both for the promoter and the bank to ensure strict compliance of the above stated provisions of the Rera Act.”
UP Rera also pointed out that some of the banks, especially those which have sanctioned loan to promoters, arbitrarily adjust the entire amount deposited in the account against the outstanding loan of the promoter, instead of transferring 70% of the money collected to the escrow account for the purpose of construction and payment of land cost.’’
He also said HRera has issued strict directions to these financiers to deposit back the excess amount withdrawn by them in violation of the statutory provision of Rera, 2016. Also, a show cause notice has been issued to the developer, asking it why penal proceedings should not be initiated against it for violating the provisions of the Act and in particular section 4(2)(l)(D).


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