The Real Estate (Regulation and Development) Bill, 2013 inched closer to seeing the light of the day after it received the Union Cabinet's nod on Tuesday.
The Real Estate (Regulation and Development) Bill, 2013 inched closer to seeing the light of the day after it received the Union Cabinet’s nod on Tuesday. The Bill will shortly be tabled in Parliament.
Recommendations include a minimum balance to be maintained in an escrow account, which companies now have to maintain for each project.
Earlier, the Bill stated that 70% of the amount collected from buyers should be deposited into the escrow within 15 days of receiving the amount, unless the state government permits an allowance.
The final version has reduced the limit to 50% and no preferential allowance can be given by state authorities. It’s common in the industry to use funds collected from a project for other purposes, mainly to buy land elsewhere. Since banks do not lend to developers for land purchase, this proposal has been one of the most debated.
“A leeway of 20% will effectively leave more in the hands of developers to continue their practice of diverting funds collected for a project towards land acquisition or other projects,” said Anuj Puri, country head, JLL India. But the restriction on developers to maintain the 50% mandate will ensure better completion records, according to Puri. Industry experts say this will result in banks lending more heavily to real estate companies as it rings in greater transparency in transactions.
“The mechanism of an escrow account means banks should become more liberal in lending to the sector,” said Niranjan Hiranandani, chairman of Mumbai-based Hiranandani Constructions.
The Bill was originally envisaged for residential transactions. Now, it covers commercial real estate as well. According to developers, a commercial asset is leased more often that not. “About 80% of the business of commercial sector is of leasing, wherein cash flow for developers only begins after the building has been constructed and clients have moved in,” said Sunil Mantri, chairman of Mantri Realty. How can provisions such as maintaining 50% recievables be applied to commercial ventures need more clarity, Mantri added.
Meanwhile, market analysts feel that once the Bill becomes a law, supply shortage is imminent in the residential sector as developers cannot market or launch a project before obtaining all necessary project-related permissions. This means they will have to arrange funds for obtaining approvals and registering projects, squeezing out cash from balance sheets.