Has escrow provision been diluted?
Changes made in RERB by the Union Cabinet will allow builders to withdraw larger chunks of money from escrow account
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 ₹ 10,000 per sq ft for an apartment to a real estate developer, the developer will deposit ₹ 5,000 (per sq ft) in the escrow account, withdrawing it for construction work. The remaining ₹ 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 ₹ 10,000 per sq ft. He will keep ₹ 3,000 with him and deposit the remaining ₹ 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 recommenda-