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
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.