Has escrow provision in RERB been diluted?

  • Jeevan Prakash Sharma
  • Updated: Mar 19, 2016 19:54 IST
The process of withdrawing money from an escrow account as defined in the RERB is in favour of developers. (File Photo)

The changes are very, very subtle but can have a major impact on the escrow provision (money set aside by real estate developers for a specific project which cannot be channelised elsewhere.This prevents delays in delivery of projects).

There were differences between the two versions of the Real Estate Regulation Bill – one prepared by the select committee of the Rajya Sabha on July 30, 2015, and the one which was passed by the Lok Sabha on March 15, 2016. Changes in the latter bill were related to section 4 (l) (D) which deals with the escrow provision.

An amendment, purportedly done by the Union Cabinet, put a question mark on the efficacy of the escrow provision in RERB.

According to the Rajya Sabha version, the developer has to deposit 50% of homebuyers’ money in an escrow account to cover construction costs. If, let us presume, a buyer pays Rs 10,000 per sq ft for an apartment to a real estate developer, the developer will deposit Rs 5,000 (per sq ft) in the escrow account, withdrawing it for construction work. The remaining Rs 5,000 is reserved for other expenses.

The amendment by the Union Cabinet, which has been passed by Rajya Sabha and Lok Sabha, says that the developer has to deposit 70% in the escrow account to cover the ‘cost of construction and land’. This means the escrow deposit has been increased from 50% to 70% by the Union Cabinet with ‘land’ added to the provision. So, the developer can, through the escrow account, recover land cost along with cost of construction.

Realty experts quizzed on the amendment by HT Estates say this inclusion has diluted the whole escrow provision. “After the amendment, if for instance a developer collects money from a homebuyer for an apartment in a proposed real estate project at the rate Rs 10,000 per sq ft. He will keep Rs 3,000 with him and deposit the remaining Rs 7,000 in the escrow account. Now before he starts construction, he can withdraw money to cover his land cost. If he can show land cost at 60% of the total cost of the project, he can withdraw 60% from the escrow account before starting construction work. Only 10% will remain in the account,” says Amit Jain, a real estate consultant who has been actively involved in the formulation of the bill.

Experts wonder why out of ten chapters, 92 sections and thousands of words of the RERB prepared by the Rajya Sabha select committee, only 12 words in the bill were deleted and five words added in section 4 (l) (D) which deals with the escrow provision.

Even the Rajya Sabha select committee while recoding its observations and recommendations has said that in some areas cost of land came to nearly 80% of the cost of the project. In spite of that the commitee fixed a limit of 50% or such higher percentage as notified by various state governments in their rules to recover only construction cost and not land cost.

“In some cases in which land cost adds to 80% of the cost of construction, the developer will withdraw almost the full amount from the escrow account to recover cost of land before construction work starts. This section has now become open to misuse. Developers will show high land cost to withdraw as much as they can from the account before starting construction,” says Rajeev Ranjan Pandey, a Delhi High Court lawyer. He also adds that many prominent developers are sitting on land parcels they bought 20 to 30 years ago at very cheap rates. “However, these developers will quote current market value of the land parcels to withdraw money from the escrow account.” Even the process of withdrawing money from an escrow account laid down in the bill is in favour of developers.

“The RERB says that an engineer, an architect and chartered accountant in practice will have to certify that the withdrawal (from escrow account) is in proportion to the percentage of the completion of the project. It doesn’t say whether these professionals should work independently or be employed by the developer.

The amended provision in the RERB gives freedom to builders to withdraw money to recover land cost even before they start construction work in the project. (HT Photo)

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