In a bid to check developers, Maharashtra, Karnataka and UP may soon make it mandatory for real estate developers to put in place an ?escrow? account mechanism to keep tab on end-use of funds.
An escrow account is opened specially for a particular project. This account ensures that money borrowed by developers from banks for development is not diverted for any other use. Accordingly, any payment related to development of the said project is disbursed from this account. Even home buyers are directed to deposit money in the escrow account so that the money is not diverted until final possession of the property.
?It is a good safety net for buyers. The government is serious about protecting investors and, therefore, enforcing it strictly. This will ensure timely completion of projects and also that funds are not diverted for any other purposes,? said Shiv Bhatia, adviser to Haryana CM Bhupender Singh Hooda, who has successfully implemented the scheme. Haryana government has taken the lead and made it mandatory for developers including DLF, Unitech and others to institute escrow account mechanism for each project in and around Gurgaon.
Last year, RBI had asked banks to put in place an escrow mechanism that can ring fence their loans to real estate firms and keep a closer tab on the end use of funds. The urban housing ministry had sent directives to implement the clause of escrow account or other investor protection measures based on the lines of Haryana model in their respective state legislation. ?We understand that the housing sector should be cleaned up so that occurrences like delays and litigation are weeded out from the system,? a senior ministry official said.
?We believe other state governments may also follow that model as that would lead to timely execution of construction of flats and lesser delays. If real estate regulator Bill is approved, other state governments can model their own state regulators on it, which includes a stipulation of having an escrow account,? Samir Jasuja, the founder and chief executive officer at, PropEquity, a real estate intelligence, data and analytics firm said.
On issue of escrow account, a study by industry body Assocham maintains that in the developed countries like the US, UK, UAE and Australia, it is a very common practice to hold such accounts for any real estate transactions. In India, this facility needs to be encouraged by insisting project developers to open an escrow account where fund flow from any financial institution to develop the project is deposited and accordingly any payment related to the development of the said projects will only be disbursed from the said account. Even the buyers of property are supposed to deposit the agreed price with developers in the escrow account so that money is kept safe and not transferred to the seller until final possession of the property, according to the Assocham study.
Realty firm DLF?s group ED Rajeev Talwar said, ?Already developers put 30% of the amount in escrow account in case of Haryana, where such a move gives surety to the end users that his project will get completed soon. I think this is a good enough reserve amount. If other state governments decide to increase the limit then it might be an area of discomfort.?
