Decoding Real Estate (Regulation and Development) Act

1. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA PUNE BRANCH OF WIRC Decoding Real Estate (Regulation and Development) Act CA Jayesh Kariya 22 December 2017

2. Framework of RERA

3. Framework of RERA

4. Framework of MAHA RERA

5. Pivotal pillars of the Act Real Estate Act Improve the perception of the sector among various stakeholders Uniform regulatory environment Financial discipline Transparency Accountability Customer centricity Compliance COMMERCIAL and RESIDENTIAL projects including PLOTTED DEVELOPMENT Land under development MORE THAN 500 SQ MTS / NO. of UNITS exceed 8 Projects which do not have COMPLETION CERTIFICATE beforecommencement of ACT RENOVATION or REPAIR or REDEVELOPMENT projects not involving Marketing, Advertising, Selling & New Allotment NEED NOT BE REGISTERED

6. Fiscal discipline will play a critical role in project development and requires utmost importance Real Estate Act Financial discipline Transparency Accountability Customer centricity Compliance Financial Discipline What it entails 70% of the funds collected from allottees needs to be deposited in the project account Withdrawals to cover construction and land cost Withdrawals to be in proportion to the % completion method Withdrawal to be certified by Engineer, Architect, and CA Promoter to compensate buyer for any false or incorrect statement with full refund of property cost with interest Project Accounts to be Audited / FY. Copy to be submitted to RERA Provision for stronger financial penalties for RERA non-compliances Interest on delay will be same for customer and promoter Provision for RERA to freeze project bank account upon non-compliance

7. Structured communication is required to furnish all project related information to the customers Real Estate Act Financial discipline Transparency Accountability Customer centricity Compliance Transparency What it entails No false statements or commitments in advertisement Quarterly updating of RERA website with details such as unsold inventory and pending approvals Number, type and carpet area of apartments Consent from affected allottees for any major addition or alteration Consent of 2/3rd allottees about any other addition or alteration No launch or advertisement before registration with RERA Informing allottees about any minor addition or alteration No arbitrary cancellation of units by promoter Project completion time frame Consent of 2/3rd allottees for transferring majority rights to 3rd party

8. A PMO would be required to track and monitor developments as per the defined project plan Real Estate Act Financial discipline Transparency Accountability Customer centricity Compliance Accountability What it entails Offence by an officer committed with the consent or connivance of any director, manager, secretary or other officer of the company, will also be guilty Quarterly update of project progress along with pending approvals on RERA website Every officer of a company, who was in charge or responsible will be liable for the conduct of the company and deemed to be guilty

9. CRM would help to enhance customer centricity focus Real Estate Act Financial discipline Transparency Accountability Customer centricity Compliance Customer centricity What it entails Sharing information project plan, layout, government approvals, land title status, sub contractors Increased assertion on the timely completion of projects and delivery to the consumer. An increase in the quality of construction due to a defect liability period of five years. Formation of RWA within specified time or 3 months after majority of units have been sold Consent of 2/3rd allottees for any other addition or alteration Consent from affected allottees for any major addition or alteration Informing allottees for any minor addition or alteration No false statements or commitments in advertisement Unbiased interest on delays

10. Registration of all projects & agents and a strong dispute management required Real Estate Act Financial discipline Transparency Accountability Customer centricity Compliance Compliance What it entails Authenticated copy of all approvals, commencement certificate, sanctioned plan, layout plan, specification, plan of development work, proposed facilities, Proforma allotment letter, agreement for sale and conveyance deed to be given when applying for project registration with RERA Registration of agents/brokers with RERA Dispute resolution within 6 months at RERA and RERA appellate tribunals Mandatory registration of new and existing projects with RERA before launch Timely updating of RERA website Separate registration of different phases of a single projects Developers to share details of projects launched in last 5 years with status and reason for delay with RERA Maximum 1 year extension in case of delay due to no fault of developer Construction and land title insurance Annual audit of project accounts by a CA Conveyance deed for common area in favor of RWA Quarterly update of project progress on RERA website

11. Registration Process

12. RERA will have power to scrutinize the application Additional powers of RERA • RERA may review the following documents submitted by a promoter: • Nature of rights and interests of the promoter to the land • Extent and location of area of land proposed to be developed • Layout of the project • Financial, technical and managerial capacity of the promoter to develop • Plan regarding the development works to be executed in the project • Conformity of development of the project with neighboring areas Requires clarity as managerial capacity is a subjective assessment Requires further clarity A second level scrutiny as the same is being done by local development authorities

13. Issues and nuances for First Time Registration • Definition of Project to be registered – Single tower, Multiple towers etc. • Determination of Land Area allocable to the respective tower to be registered in case of a layout project . • Estimation of Project Cost – Various factors to be considered – Escalations, Contingencies, Future regulatory fees (eg. BMC fees) etc. • Allocation of cost already incurred to respective towers in case of layout project. • Allocation of cost on case of SRA project involving Rehab building and sale building. • Land owners and JDA partners to be considered as “Promoters”. • Society to be considered as a Promoter in case of a redevelopment project. • Ensure appropriate disclosures in agreement for sale as well as details to be uploaded at the time of registration to overcome penalty exposure.

14. Redressal Mechanism

15. Redressal mechanism Promoter Or Allottee Or RE Agent Suo-motto investigation Call for details / information as maybe required, call for attendance, etc and give opportunity for hearing 1 RER Authority /AO 2 Any aggrieved person can file complaint Issue order* 3 RERA Appellate Tribunal** Aggrieved person can file an appeal within 60 days from receipt of order 4 Issue order 5 High Court File a appeal before the High Court against the order of RERA Appellate Tribunal within 60 days from receipt of order 6 *for payment of compensation/ penalty basis complaint received or suo-moto investigation **Promoter aggrieved by the order of the Authority or of AO, the appeal before RERA Tribunal can be heard only after deposit of atleast 30% of the penalty or such higher % as may be determined or payment of interest and compensation to the Allottee, or both

16. Appellate Tribunal Important Aspects • Tribunal to pass the order within 60 days – record reasons for any delay in disposal of appeal • Tribunal not bound by the procedures under Code of Civil Procedure 1908 – can have its own procedures and shall be guided by principles of natural justice • Tribunal not bound by the rules of evidence under Indian Evidence Act, 1872 • Tribunal has same powers as are vested in Civil Court under the Code of Civil Procedures 1908 – examine documents, issue summons, examination on Oath, asking affidavits, issuing commissions for examination of documents/witness, reviewing decisions, etc. • All proceedings before Tribunal to be judicial proceedings under Indian Penal Code and tribunal shall be deemed to be a Civil Court for the purposes of Code of Criminal Procedure 1973 • Order passed by Tribunal to be executed as Decree of Civil Court • Allottee or Complainant cannot seek remedy both before the Tribunal and Civil Court – No Civil Court has jurisdiction to entertain any suit or proceedings in respect of any matter with the Authority or Tribunal • Appeal can be preferred against the order of Tribunal before HC within 60 days • Representations before Authority and Tribunal can be made by Company Officer or CA or CS or Cost Accountant or legal practitioner

17. Offences and Penalties

18. Offences and Penalty

19. Prosecution and Compounding Important Aspects • Non compliance of penalty order by Promoter (for non-registration of Project) issued by the Authority entails imprisonment upto 3 years or further penalty of 10% of estimated cost or both • Non compliance with the order of the Appellate Tribunal by Promoter entails imprisonment upto 3 years or further penalty of 10% of estimated cost or both • Non compliance with the order of the Appellate Tribunal by Agent entails imprisonment upto 1 year or daily fine of 10% of estimated cost of apartment or plot of land • Non compliance with the order of the Appellate Tribunal by Allottee entails imprisonment upto 1 year or daily fine of 10% of estimated cost of apartment or plot of land • Imprisonment punishment could be compounded (before or after the institution of prosecution) can be compounded by the Court

20. Separate project account (70:30 Rule)

21. Separate Project account (70:30 Rule) Safeguarding consumer interest 70:30 Rule • Of the total collections, only 30% can be withdrawn without any restriction. • Rest of the amount (70%) can be withdrawn in stages in proportion to the percentage completion of the project (construction cost plus land cost). • Withdrawals to be certified by CA, Engineer and Architect; Audit report by a practicing CA to be submitted to RERA annually. 70:30 Formula Formula • Total Cost incurred for the project / Estimated Cost of the project x 100

22. Applicability of the 70:30 rule to the ongoing projects Applicability of the 70:30 rule to the ongoing projects Applicable Prospectively • 70% of the amount to be realized from the allottees shall be deposited in such separate account 100% of the Amount to be realized to be deposited • In the event where the estimated receivables of the ongoing project is less than the estimated cost of completion of the project, then 100% of the amount to be realized from the allottees shall be deposited in the said separate account

23. Applicability of the 70:30 rule to the ongoing projects Maximum Amount that can be withdrawn- 1,200 Crore

24. Applicability of the 70:30 rule to the ongoing projects Maximum Amount that can be withdrawn- 700 Crore

25. Withdrawals from Project Account Withdrawals from project account • Withdrawal from project accounts – following documents are required for withdrawal from project account • A certificate from Architect certifying the percentage of completion of construction work • A certificate from the engineer for the actual cost incurred on the construction work • A certificate from a CA for the cost incurred on construction cost and land cost • The Chartered Accountant shall also certify the proportion of the cost incurred on construction and land cost to the total estimated cost of the project • The total estimated cost of the project multiplied by such proportion shall determine the maximum amount which can be withdrawn by the promoter from the project account. • As per the Act, the land cost can be withdrawn only in proportion to construction cost even if it has been paid in full.

26. Project and Land Cost Project and Land Cost Land Cost • The costs incurred by the Promoter for acquisition of ownership and title of the land parcels proposed for the real estate project, including its lease charges, which shall also include overhead cost, marketing cost, legal cost and supervision cost; • Premium payable to obtain development or redevelopment rights; • Amount paid for acquisition of TDR; • Premium for grant of FSI, including additional FSI (if any), fungible FSI; and any other instruments permissible under the Development Control Regulations; • Consideration payable to the outgoing developer to relinquish the ownership and title rights over such land parcels; • Amounts payable to State Government or Competent Authority or any other Statutory Authority of the State or Central Government, towards Stamp Duty, transfer charges, registration fees etc.; and

27. Construction Cost Project and land cost Construction Cost • All such costs, incurred by the Promoter, towards the on-site and off-site expenditure for the development of the Real Estate project including: • Payment of Taxes, Fees, Charges, Premiums, Interest etc. to any Competent Authority or Statutory Authority of the Central or State Government under any laws or rules or regulations of the time being in force; • Principal sum and interest, paid or payable to any financial institutions including scheduled banks or non-banking financial companies etc. or money-lenders (under the Maharashtra Money-Lending Regulation Act, 2014) for the Real Estate Project; • Excludes loan obtained from banks, non-banking finance companies or money-lenders, for the purpose of purchase of land for the project or for obtaining the development rights over such land.

28. Role of Chartered Accountant in MahaRERA

29. Certificates to be issued by CAs • At the time of Registration of the Project by the Developer – Form 3 • At the time of withdrawals by the developers from a RERA Account – Form 3 • Statutory Audit Certificate on annual basis by a Statutory Auditors – Form 5 • Other Certificates Required • Certifying the cost of Rehabilitation Cost – Explanation IV to Rule 5 • Existing Projects – Separate Certificates for following aspects? • Receivables from sold Inventories • Verification of Balance unsold area • ASR value of unsold flats to be realised

30. Certification by a Chartered Accountant under RERA

31. CA’s Certificate- Form 3 The CA’s certificate has to be issued in Form 3 as prescribed per MahaRERA regulations. The Certificate contains the details (Both Estimated as well as Actual) of- • Land Cost, Development Cost, • Total Estimated Cost and actual Cost incurred • Percentage completion of the work (as per Architects Certificate) • Percentage of Cost incurred to estimated costs • Withdrawable amount from the designated bank account after considering the amount already withdrawn till date. • For ongoing projects • Estimated Balance Cost • Balance amount of receivables from the sold apartments • Estimated amount of sales proceeds in respect of unsold Apartments based on ASR Rate (Ready Reckoner Rate) • Amount to be deposited in the bank account. • The CA has to attach his workings as per prescribed format as per MahaRERA (i.e. Annexure A to Form 3).

32. Form 3 Chartered Accountants Certificate (on the Letter head) (FOR REGISTRATION OF A PROJECT AND SUBSEQUENT WITHDRAWAL OF MOnEY) Cost of Real Estate Project MahaRERA Registration Number

35. Total Estimated Cost of the Real Estate Project [1(i) + 1(ii)] of Estimated Column Total Cost Incurred of the Real Estate Project [1(i) + 1(ii)] of Incurred Column % completion of Construction Work % (as per Project Architect’s Certificate) XX%

36. Additional Information for Ongoing Projects Estimated Balance Cost to Complete the Real Estate Project (Difference of Total Estimated Project cost less Cost incurred ) (calculated as per the Form IV) Balance amount of receivables from sold apartments as per Annexure A to this certificate (as certified by Chartered Accountant as verified from the records and books of Accounts) (i) Balance Unsold area (to be certified by Management and to be verified by CA from the records and books of accounts) (ii) Estimated amount of sales proceeds in respect of unsold apartments (calculated as per ASR multiplied to unsold area as on the date of certificate, to be calculated and certified by CA) as per Annexure A to this certificate 4. Estimated receivables of ongoing project- Sum of 2 + 3(ii) 5.Amount to be deposited in Designated Account – 70% or 100% IF 4 is greater than 1, then 70 % of the balance receivables ofongoing project will be deposited in designated Account IF 4 is lesser than 1, then 100% of the of the balance receivables of ongoing project will be deposited in designated Account %

37. Annexure A to Form 3 Statement for calculation of Receivables from the Sales of the Ongoing Real Estate Project Sold Inventory

38. Annexure A to Form 3 Unsold Inventory ValuationReady Recknor Rate as on the date of Certificate of the Residential /commercial premises INR XXX per sm.

39. Form 5- Annual Report on Statement of Accounts Form 5 is an annual report on the statement of accounts. It has to be issued by the Chartered Accountant who is the Statutory Auditor of the Promoters company/ Firm) It should be obtained within 6 months six months from the end of the fiscal year for every registered Project It should be a report on the fund utilization and withdrawal by the promoter with respect to the project • Not a certificate by an audit and opinion • Not a full fledged Audit report of the Developer but of every Project Required to be provided by all Promoters – whether incorporated entity or not The Promoter should provide a Self- Declaration to the Bank confirming that the Statutory Auditors Certificate has been obtained and need to be submitted to their Bankers

40. Other Clarifications issued by MahaRERA

41. Treatment of Cancellation Charges Cancellation amounts if any to be paid by the Promoter to the Allottees on cancellation of Booking/ Allotment of the Apartment, should be treated as cost incurred for the Project and the Same can be withdrawn from the Separate Bank account to the extent of 70% of the amounts to be paid to the Allottees on cancellation of booking/allotment, since only 70% of the amounts realized from the Allottees would have been deposited in the separate bank account. However, the Compensation / interest paid by the promoter to the Allottees should be treated as cost incurred for the project and hence the entire sum required to be paid by the way of compensation / interest to the allottees can be withdrawn from the Separate Bank account. - MahaRERA Circular No. 7/2017 dated 4 July 2017

42. Fixed Deposits with Banks The Separate Bank account opened in accordance with the provisions of section 4(2)(1)(D) of RERA, shall be a no lien account and withdrawal from such separate bank account shall always be in accordance with the Provisions of RERA, Rules, Regulations and Circulars issued by MahaRERA from time to time. The Excess monies lying in the Separate Bank account can be put in a fixed deposit with the bank operating the separate bank account and which has to be a no lien Fixed Deposit and no loan can be obtained against or on such fixed deposit nor any charge can be created on such fixed deposit. “ In case of Fixed Deposit being made from the monies lying in the separate bank account , then the Chartered Accountant shall verify that there is no lien or Charge on such fixed deposits. The Promoter and/or Chartered accountant shall verify that there is no lien or Charge certificate in respect to such fixed deposit , from the bank once every three months - MahaRERA Circular No. 7/2017 dated 4 July 2017

43. Fixed Deposits with Banks In case of Fixed Deposit being made from the monies lying in the separate bank account , then the Chartered Accountant shall verify that there is no lien or Charge on such fixed deposits. The Promoter and/or Chartered accountant shall verify that there is no lien or Charge certificate in respect to such fixed deposit , from the bank once every three months - MahaRERA Circular No. 7/2017 dated 4 July 2017

44. Pass through Charges The Promoter to Deposit the Pass through Charges (amount collected for and on behalf of Legal Entity or Apex Body or any statutory Authority or Local body) should be deposited preferably in a designated bank account opened just for the purpose of depositing such Pass through Charges or in any other bank account of the promoter and should not be deposited in the separate bank account . However, Promoter shall be required to give account of the monies collected as Pass through Charges to the legal Entity or Apex Body. - MahaRERA Circular No. 7/2017 dated 4 July 2017

45. Open issues Allocation of Land Cost in case of layout and large developments Allocation of costs for common amenities and Infrastructure Allocation of off-site costs to various projects Which method of accounting to be followed – cash or mercantile? Meaning of Incurred – to be applied prudently Payment of fungible premium in case of layout and large developments Allocation of costs in case of Parking Projects registered separately or shown as common areas Allocation of cost of Public Parking in case of layout projects Marketing cost of acquisition of land/projects – whether covered as land cost? Circulars and Clarifications issued by RERA Authorities should be applied blindly? Will it survive if beyond the Act and Rules? Amount withdrawn to be utilized Only for the Project – Can it be utilized for purchase of land for other projects Meaning of On-site and Off-site costs – not reflected in certificate

46. Disclosures and Disclaimers by CAs

47. Disclosures and Disclaimers by CAs Obtain Management Representations from the Promoters Certificates obtained from various professionals and agencies and relied upon Assumptions and views taken on various aspects Escalations considered Basis of allocation of land cost in case of layout plans and large formats Basis of allocation of Construction Costs in case of layout plans and large formats Treatment given to specific clauses in respect of interest payments to Investors and Financial Institutions Provision for Warranties and contingencies Provision for Encumbrances Provision for Disputed taxes, duties, cess ,etc.

48. Disclosures and Disclaimers by CAs Disclosure of financial terms of JDAs considered for certification ASR value has been considered based on third party certificates NO monies borrowed against FDs created out of funds in RERA Account or lien created against such FDs Certificates issued relying on the Provisions of the RERA Act, RERA Rules, Circulars/Clarifications/Orders/FAWs issued by MahaRERA Authorities and judicial rulings, if any Common Amenities and Infrastructure Allocation of costs in relation to Common Amenities and Infrastructures Contingent liabilities which are not considered Any unusual or aggressive position taken while computing the costs to be certified Accounts & documents reviewed, clarifications considered, Not conducted an audit of accounts or detailed review of documents – disclose the process followed and principles applied

49. Joint Development Arrangements

50. Joint Development Arrangements- Mechanism Upfront consideration Developer Land Owner Initial backlog Increased project cost Tight liquidity Rise in cost of capital Consolidation Enters into development agreement % share in revenue % share in revenue Revenue Sharing Models Upfront Payment of Consideration Or/ And Development of Project Lease /sale of asset to earn income Built- Up Area Or/ And Gross / Net Revenue