Why is your money be­ing mis­used?

Pay­ments for apart­ments are be­ing di­verted by some de­vel­op­ers to their sub­sidiaries, lead­ing to late de­liv­ery and other prob­lems

HT Estates - - FRONT PAGE - Jee­van Prakash Sharma

Deve l o p e r s d e s - per­ately in need o f c ap i t a l a r e f l oati ng s i s t e r con­cerns and di­vert­ing money col­lected for one spe­cific hous­ing pro­ject to another. Of­ten, funds dry up as some projects run into losses, lead­ing to de­lay in de­liv­ery of apart­ments. This is why law­mak­ers need to act quickly on the pro­posed real es­tate reg­u­la­tion bill as it moots the set­ting up of es­crow (de­posit­ing money for a pro­ject in one ac­count and strictly mon­i­tor­ing its with­drawal) ac­counts for hous­ing projects.

In a re­cent case, t he Al­la­habad High Court is­sued a no­tice to the Noida Au­thor­ity af­ter 27 home own­ers al­leged that money col­lected from them for a group hous­ing pro­ject in Sec­tor 100, Noida, had been di­verted to as­so­ciate and group com­pa­nies which had again in­vested the money in other NCR prop­er­ties.

In another case be­ing in­ves­ti­gated by the Eco­nomic Of­fence Wing (EOW) of the Delhi Po­lice, a real es­tate devel­oper al­legedly col­lected hun­dreds of crores from in­vestors and banks for his com­mer­cial pro­ject in Lud­hi­ana and lent funds to his sis­ter con­cerns as loans. Later, he wrote off all the loans due to which the com­pany be­came a non­per­form­ing as­set.

“This is just the tip of the ice­berg. Many such cases are be­ing re­ported be­cause builders have started de­fault­ing on projects and de­lay­ing them as funds col­lected for the same

pro­ject have been di­verted for other loss-mak­ing ven­tures lead­ing to dry­ing up of funds. Home­buy­ers are now aware of this. In fact, many de­vel­op­ers have floated mul­ti­ple com­pa­nies just for fund di­ver­sion,” says an in­ves­ti­gat­ing of­fi­cer from EOW

Of­ten, sub­sidiaries are floated to di­vert funds. “Dur­ing our in­ves­ti­ga­tions, we have come across cases in which the di­rec­tor of a par­ent com­pany floated other com­pa­nies and ap­pointed his wife and chil­dren as di­rec­tors only with the in­tent to di­vert funds in other com­pa­nies, risk­ing the hard-earned money of the home­buy­ers,” the EOW of­fi­cial adds.

Ex­perts say there are var­i­ous ways in which the sit­u­a­tion can be dealt with. In a ma­jor­ity of cases of funds di­ver­sion, it has been seen that the par­ent com­pany has not filed its bal­ance-sheet with the com­pe­tent au­thor­ity an­nu­ally.

“A com­pany’s au­dit re­port, done for the pur­pose of fil­ing in­come tax, is ba­si­cally the bal­ance-sheet of the com­pany which is filed with the reg­is­trar of com­pa­nies and min­istry of cor­po­rate af­fairs ev­ery year. The penalty for not fil­ing in­come tax re­turns or the bal­ance sheet is not very harsh in our coun­try. The max­i­mum fine that can be im­posed on the com­pany is 1 lakh and

ap­prox­i­mately 24% in­ter­est on taxes due to the depart­ment. On an av­er­age, 15% com­pa­nies don’t file their in­come tax re­turns ev­ery year in a dis­ci­plined man­ner,” says Neeraj Singh, a charted ac­coun­tant.

An es­crow ac­count, as pro­posed in the real es­tate reg­u­la­tion bill, can to some ex­tent check the prob­lem. Ac­cord­ing to sec­tion 4(2)(i)(D) of the pro­posed bill, 50% or higher (as no­ti­fied by the ap­pro­pri­ate gov­ern­ment) of the amount re­alised for real es­tate pro­ject from al­lot­tees, from time to time, has to be de­posited in a sep­a­rate ac­count to be main­tained in a sched­uled bank to cover the cost of con­struc­tion. It has to be used only for a spe­cific pur­pose.

“That will be a good prac­tice which I think will dis­ci­pline de­vel­op­ers and en­sure the pro­ject gets com­pleted on time,” says SK Pal, a Supreme Court lawyer, who is ap­pear­ing for home­buy­ers in a sim­i­lar case in the Al­la­habad High Court.


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