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The escrow account question

real estate Updated: Dec 21, 2015 16:41 IST
Real estate regulation bill

One of the salient features of the Real Estate (Regulation and Development Bill) 2015, which the government release has highlighted, is the deposit of specified amount in an escrow account -- a separate bank account to cover the construction cost of the project for its completion on time (Hindustan Times)

When the select committee of the Rajya Sabha in its final recommendations on the Real Estate (Regulation and Development Bill) 2015 has clearly stated that a developer has to keep at least 50% of the total money collected from homebuyers in an escrow account (a separate account for construction purposes), why is it being reported in the media that the limit is 70%, including land costs?

Interestingly, the Cabinet committee had approved the bill with the Rajya Sabha select committee’s recommendation that the escrow limit be set at 50%.

Announcing the decision of the Cabinet Committee, a Press Information Bureau release dated December 9, 2015, had stated, “The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has approved the Real Estate (Regulation and Development) Bill, 2015, as reported by the Select Committee of Rajya Sabha. The Bill will now be taken up for consideration and passing by the Parliament.”

One of the salient features of the bill, which the government release has highlighted, is the deposit of specified amount in an escrow account -- a separate bank account to cover the construction cost of the project for its completion on time.

“The government press release says that a specific amount has to be deposited in a separate bank account to cover construction costs. Nowhere does the release say that the deposited amount will also cover land cost. So where does this 70% figure come from? Both statements can’t be correct. If the cabinet committee has approved all the select committee recommendations, as reported in the government’s release, then the deposit limit is only 50% and that money will only be used for the purpose of construction. However, if the Cabinet committee hasn’t approved all the recommendations of the select committee, then the government release is misleading. Change in the limit and use of money deposited in a separate account is a major modification in the bill,” says a senior consultant in the urban development ministry.

The consultant feels the release will create some confusion. “How will the land cost be calculated? Who will calculate it? The bill needs further discussion because then it needs to be added that the withdrawal of money from the separate account is not only for construction but also for purchase of land. This will definitely delay the whole process of passing of the bill.”

The developers’ failure to register projects with the regulatory authority will attract a fine which is 10% of the projects’ estimated cost as per the Real Estate (Regulation and Development Bill) 2015 (HT Photo)

According to section 2, sub clause (i)(d) of the Real Estate (Regulation and Development Bill) 2015, as reported by the select committee of the Rajya Sabha, “That fifty percent, or such higher percent, as notified by the appropriate government, of the amounts realised for the real estate project from the allottees, from time to time, shall be deposited in a separate account to be maintained in a scheduled bank to cover the cost of construction and shall be used only for that purpose…”

Many experts who have been key contributors to the formation of the bill say that developers have always tried to create hurdles in the way of provisions being made for a separate account.

“During UPA’s tenure, the original bill had a provision which made it mandatory for a developer to deposit 70% of money collected from buyers in a separate account to cover the cost of construction, but when the BJP government came to power, after consulting with developers and other stakeholders, the amount was reduced to

50% or such lesser percentage as decided by the appropriate government. When this bill was tabled in the Rajya Sabha, the opposition raised objections against the changes and the bill was sent to a select committee for further consultation. The select committee then changed it to 50% or such higher percentage. Now the news reports of 70% are quite startling,” says Amit Jain, a key contributor in the drafting of the real estate regulation bill.