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Do you know that the money you pay for your flat is being diverted by builders to their subsidiaries?

Developers desperately in need of capital are floating sister concerns and diverting money collected for one specific housing project to another. Often, funds dry up as some projects run into losses, leading to delay in delivery of apartments. This is why lawmakers need to act quickly on the proposed real estate regulation bill as it moots the setting up of escrow (depositing money for a project in one account and strictly monitoring its withdrawal) accounts for housing projects.


In a recent case, the Allahabad High Court issued a notice to the Noida Authority after 27 home owners alleged that money collected from them for a group housing project in Sector 100, Noida, had been diverted to associate and group companies which had again invested the money in other NCR properties. 

In another case being investigated by the Economic Offence Wing (EOW) of the Delhi Police, a real estate developer allegedly collected hundreds of crores from investors and banks for his commercial project in Ludhiana and lent funds to his sister concerns as loans. Later, he wrote off all the loans due to which the company became a non-performing asset.

 “This is just the tip of the iceberg. Many such cases are being reported because builders have started defaulting on projects and delaying them as funds collected for the same project have been diverted for other loss-making ventures leading to drying up of funds. Homebuyers are now aware of this. In fact, many developers have floated multiple companies just for fund diversion,” says an investigating officer from EOW.

Often, subsidiaries are floated to divert funds. “During our investigations, we have come across cases in which the director of a parent company floated other companies and appointed his wife and children as directors only with the intent to divert funds in other companies, risking the hard-earned money of the homebuyers,” the EOW official adds.

Experts say there are various ways in which the situation can be dealt with. In a majority of cases of funds diversion, it has been seen that the parent company has not filed its balance-sheet with the competent authority annually.
“A company’s audit report, done for the purpose of filing income tax, is basically the balance-sheet of the company which is filed with the registrar of companies and ministry of corporate affairs every year. The penalty for not filing income tax returns or the balance sheet is not very harsh in our country. The maximum fine that can be imposed on the company is `1 lakh and approximately 24% interest on taxes due to the department. On an average, 15% companies don’t file their income tax returns every year in a disciplined manner,” says Neeraj Singh, a charted accountant. 
An escrow account, as proposed in the real estate regulation bill, can to some extent check the problem. According to section 4(2)(i)(D) of the proposed bill, 50% or higher (as notified by the appropriate government) of the amount realised for real estate project from allottees, from time to time, has to be deposited in a separate account to be maintained in a scheduled bank to cover the cost of construction. It has to be used only for a specific purpose.

“That will be a good practice which I think will discipline developers and ensure the project gets completed on time,” says SK Pal, a Supreme Court lawyer, who is appearing for homebuyers in a similar case in the Allahabad High Court.

Escrow accounts have not worked in Haryana housing

Though real estate experts feel the provision of escrow in the proposed real estate regulation bill will discipline developers and force them to use funds for a specific project and complete it on time, a similar provision in The Haryana Development and Regulation of Urban Areas Act, 1975, has not enabled timely delivery of apartments in Gurgaon and Faridabad.

Section 5 (1) of the said Act, which deals with ‘Cost of Development Works’, states, “The colonizer shall deposit thirty per centum of the amount released, from time to time, by him, from the plot-holders within a period of ten days of its realization in a separate account to be maintained in a scheduled bank. This amount shall only be utilised by him towards meeting the cost of internal development works in the colony. After the internal development works of the colony have been completed to the satisfaction of the director, the colonizer shall be at liberty to withdraw the balance amount. The remaining seventy per centum of the said amount shall be deemed to have been retained by the colonizer, inter-alia, to meet the cost of land and external development works.”

The Act has not been enforced properly. “Every developer gets an escrow account opened. And though he deposits 30% of the total money collected from homebuyers he can withdraw it without seeking permissions from anyone. However, the Act states that the director of department of town and country planning can inspect the developers’ account and scrutinise his expenses to make sure that withdrawal from the escrow account is for the purpose for which it was created. This is where the problem is as the government agencies are not doing a good job,” says SK Sayal, managing director, Bharti Realty.

According to section 6 (I) of the Act, which deals with ‘Auditing of accounts,’ the director, or any other officer authorised by him shall be competent to inspect the accounts maintained by the coloniser who shall produce before him all the relevant records required for this purpose.

“The colonizer shall get his accounts audited, after the close of every financial year, by a chartered accountant and shall produce a statement of accounts, duly certified and signed by such chartered accountant, in the manner prescribed,” section 6 (2) states.

Amit Jain, founder, Centre for Research and Analysis of Real Estate in India, an NGO working on real estate issues, wonders how the escrow account will be monitored. “If developers are allowed to withdraw money from the escrow account without anyone’s permission, then it’s very important to have in place measures for frequent and regular audits of the account. That’s why the Regulatory Bill proposes that that the amount from the separate account shall only be withdrawn by the promoter after it is certified by an engineer, an architect and a chartered accountant that the withdrawal is in compliance with the percentage of completion of the project.” 
The bill also states that the promoter shall get his accounts audited within six months after the close of every financial year by a chartered accountant and publish on its website a statement of accounts duly certified and signed by the chartered accountant. It will also be verified during the audit that the amount collected for a particular project has been utilised for that project and the withdrawal has been in compliance with the percentage of completion of the project. 
“If these provisions are not implemented strictly, the purpose of escrow accounts will be completely defeated,” says Jain.

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Realty Trends

Home prices near most-affordable levels in over 30 years: HDFC

Home prices may have been on an upward spiral for many years, but the cost of owning a house in India remains near the most affordable level in over three decades, shows data compiled by mortgage giant HDFC Ltd.

The average price of a home, purchased with a housing loan, rose to over Rs. 45 lakh in the 2012-13 fiscal year -- marking the fourth consecutive year of uptrend from about Rs. 25 lakh in the year 2008-09, HDFC has said in a presentation.

However, factors like an even greater surge in the personal income levels, tax incentives and lower interest rates, have resulted into houses becoming more affordable to purchase, it said.



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India Property Investment Gyan

Major schemes for affordable housing to be modified: Girija Vyas

NEW DELHI: Major schemes meant for providing affordable housing to urban poor will soon be modified to make them more people-friendly, the government said today and invited the private sector to contribute more actively in this area. 

Speaking to reporters here, Housing and Urban Poverty Alleviation (HUPA) ministerGirija Vyas today said her ministry is modifying all the major schemes including the Rajiv Awas Yojana (RAY), Rajiv Rinn Yojana and the, Affordable Housing in Partnership scheme and added enormous budgetary support has been earmarked during the current plan period. 

Secretary HUPA Arun Kumar Misra told reporters that a fund of Rs 35,000 crore had been allocated to the ministry for the implementation of three major schemes, including RAY, which was being run in as a pilot project earlier under 12th five- year plan. 

He said the ministry would require approval from the cabinet for the implementation of these schemes and efforts would be made that through these funds 2 million affordable houses are encouraged. 

He said that in addition to the central government funds, banks and credit institutions would be providing funds for construction of affordable houses. 

Vyas said that with urbanisation, the number of urban homeless and area under slums had grown. 

Vyas said there was a need for private developers to develop economic models to foster affordable housing for economically weaker sections and lower income group households in urban areas as government efforts in this direction needed to be supplemented. 

Vyas also said a technical group, set up by her ministry, had shown that out of 18.78 million housing shortage in the country, 96 percent shortage is in EWS and LIG category and for this huge investments and private sector participation were required. 

Misra said the group set up by the ministry has suggested incentives for the affordable housing sector included concessions to development-related charges and service taxexemptions. 

It also sought direct tax rebates for affordable housing projects and inclusion of the sector in the 'infrastructure facility' he said and added the task force had felt that governments need to still provide direct capital grant support to affordable housing projects. 

Misra said that in the symposium held today where states, experts and private sector representatives were present, there was unanimity on many of the suggestions.

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Green Property- Eco Homes

Reclaim your city space: Projects in Delhi, Mumbai and Kolkata aim to transform lives

Three projects in three cities aim to transform the lives of people who live close by. The one in Mumbai hopes to transform a congested area into a green precinct; the one in Delhi converted an open drain into a walkway, while Kolkata hopes to bring the crowds back...