RERA: A private equity perspective
The advent of liberalization followed by a phase-wise relaxation of foreign investment norms in real estate has led to major private equity (PE) investors making a beeline for India. While changes to the regulatory framework have bolstered the sanguine mood of PE investors, the introduction of landmark Real Estate (Regulation and Development) Act, 2016 (RERA) has stirred PE investors to review their existing positions and approach their future investments cautiously.
RERA is being touted as an unprecedented “pro-consumer” legislation that is going to usher in greater accountability and transparency from developers, protect interest of consumers and establish speedy grievance redressal mechanisms. While such legislation is welcome, it is feared that implementation of protectionist measures through RERA may inadvertently collide with economic interests of bona fide parties. It is at this juncture that RERA crosses path with PE investors.
RERA prescribes a wide definition for “promoter” that includes any person who causes the construction or sells constructed apartments. This has sparked fear among PE investors of being classified as “promoter” by virtue of investment in the developer entity or by co-branding the real estate project with developer for augmenting project’s marketability. Being classified as promoter entails a multitude of obligations under RERA, including making regulatory filings, procuring completion or occupation certificate, insuring the project, etc., and grave penal consequences follow non-fulfilment of such obligations.
While investment documents are generally framed to provide overarching rights to investors in order to protect their investments, it may now be worthwhile to structure investments in a way to reflect an investor’s non-participative role in day-to-day affairs and management of the entity or implementation of project.
Affirmative rights, which obligate a developer to seek an investor’s consent before acting on certain matters, would now need to be carefully crafted. Further, investment documents generally provide rights to PE investors to take over the real estate project and ensure completion thereof in case of default by developer. Under RERA, exercise of such right would require a consent of two-thirds of allottees in the project and the RERA authority, pursuant to which, obligations of promoter would stand enjoined upon the investor. Such interplay in practice would perhaps require PE investor to work alongside the allottees.
States are to implement provisions of RERA by framing rules and regulations. Therefore, RERA will play out differently in different states. A classic example of such difference is in respect of one key feature of RERA, which mandates that 70% of proceeds from allottees should be deposited in a designated account to cover cost of construction and land cost. Withdrawal from such designated account is subject to certification by architect, engineer and chartered accountant confirming the withdrawal being in proportion to percentage of completion of project. Rules framed by Maharashtra RERA Authority (MahaRERA) includes principal sum and interest payable to investors/lenders within ambit of cost of construction; unlike rules framed by the authority in Karnataka. Although this provision is not likely to impact investors whose exit are generally by third party sale, it may, however delay payment of coupon or principal to investors investing through structured debt or quasi equity instruments.
RERA promises to bring clarity and rationalization, which is sure to foster a positive environment for PE players. However, much will depend on administration and implementation of this nascent law. It will be pertinent to make reference to a recent verdict of the Supreme Court in Shivshakti Sugar Mills Ltd vs. Shree Renusagar Sugar Ltd wherein it was observed that “while application of law and interpreting a particular provision, economic effects, where warranted has to be kept in mind”.
RERA authorities should take cue from this verdict in the interest of promotion of steady investments in the real estate sector.
Sambhav Ranka is partner, and Nitesh Tiwari is senior associate at IC Legal, Advocates & Solicitors, Mumbai.