By

E. Suhail Ahmed

Partner- TRIALBASE,

Advocates Legal Consultant-RERA CONSULTANTS LLP

A Promoter while filing an application under Section 4 of The Real Estate (Regulation and Development) Act, 2016 is required to file a declaration supported by an affidavit stating

(D)       That seventy percent of the amount 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 the land cost and shall be used only for              that purpose:

further the proviso’s to the aforesaid Section which read as under:

  • Provided that the Promoter shall withdraw the amount from the separate account, to cover the cost of the project, in proportion to the percentage of completion of the project:
  • Provided further that the amounts from the separate account shall be withdrawn by the Promoter after it is certified by an engineer, an architect and a chartered accountant in practice that the withdrawal is in proportion to the percentage of completion of the project:
  • Provided also that the Promoter shall get his accounts audited within six months after the end of every financial year by a chartered accountant in practice, and shall produce a statement of accounts duly certified and signed by such chartered accountant and it shall be verified during the audit that the amounts collected for a particular project have been utilized for the project and the withdrawal has been in compliance with the proportion to the percentage of completion of the project.

As per the aforesaid conditions stipulated under the Act, it is necessary for a Promoter who has registered his project under The Real Estate (Regulation and Development) Act to :

  1. Open a separate account in a scheduled bank and deposit 70% of the amount realised for the real estate project from the Purchasers /Allottees into that account.
  2. Any amount withdrawn from the separate account shall be utilized to cover the cost of the project.
  3. Every withdrawal shall be in proportion to in percentage of completion of the project and the same is to be certified by an engineer, an architect and a chartered accountant in practice who shall certify that the withdrawal is in proportion to the percentage of completion of the project.

To put the above into practice it is advisable that if the project is an ongoing project certificates from engineers, architects and chartered accountants be obtained at the time of filing of the application for registration of the project thus enabling the Promoter to determine the percentage of the completion of the project as on the date of filing of the application for registration of the project. It would also help to determine the amount collected and the balance receivables so as to determine whether the percentage of work completed is higher than the amount collected or is lower.

In the event, the percentage of work completed is higher than the amounts realised from the sales in the real estate projects, then the Promoter would not be required to obtain any further certificates until the withdrawal of funds become equivalent to the percentage of work completed. In case where the percentage of work completed is lower than the amounts realised and utilized then no further withdrawals can be made from the separate accounts until the percentage of work completed becomes equivalent and higher than the amounts realised.

In order to practically manage the distribution of funds, it is advisable to check with the banker if it has a RERA complaint account and if so open such an account. The modus that can be adopted is to have a single collection account wherein all the amount realised from the sales in the real estate project can be deposited and from such account 70% of the funds can be transferred to the separate account and the remaining 30% can be transferred to the regular current account of the Promoter. The funds in the 30% account are free to be utilized in any manner deemed fit by the Promoter. However, the funds from the 70% can only be withdrawn in proportion to percentage of completion of work and utilised only to cover the cost of that particular project.

In view of the aforesaid method of utilization of funds every Promoter has to bear in mind that going further it would become essential for proper financial planning for development of a real estate project since the Promoter can only withdraw funds only after having incurred expenditure towards development of the project. Further it has to be kept in mind that the percentage of completion of work in terms of the lands and construction cost are equal and proportional in most of the states in India except may be Madhya Pradesh wherein under the Rules, a Promoter is allowed to withdraw 100% of the land cost even before completing the development work.

By virtue of the stipulations contained in Section 4 (2) (l) (D) what The Real Estate (Regulation and Development) Act envisages to inculcate in a Promoter developing a Project is:

  1. Financial discipline
  2. Financial planning envisaging the requirement of funds from the start of the Project till the end
  3. Procure funds to spend first and then become eligible to withdraw the money from 70 % account
  4. Non diversion of funds – utilization of funds only for that particular project
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